Forex Trading
Often, traders believe that to succeed at trading they need a big trading account. But, this is simply not true. IN fact, you can lose money on a big trading account just as fast as you can on a small trading account. It’s best to start with a smaller account even if you have a lot of money to trade with. Will a large trading capital reserve allow you to make more money faster? Sure. But, fi you don’t know what you’re doing you can also lose that money faster.
The strategies, skills and mental attitudes you need to succeed at trading will work on a small account the same as a big account. It’s always best to start on a small account and hone your skills, then when you’re ready you can deposit more money if you have it or just keep building that small account.
Don’t be in a rush! If you build a track record of successful trading on a live account, even a small one, you will be a successful trader. Building a successful live account track record over a period of a year or more is something that FEW people can do. If you do that, even on a small account, your success will start to snowball.
Myth: You have to know what is going to happen next in a market to make money.
Truth: You don’t have to be right or know what will happen next to make money, you must understand that you can never know for sure what will happen…
One huge myth about trading is that to make money you must know what will happen next. This couldn’t be further from the truth and in fact, it’s not even possible. Part of trading is that there is a random expectation for any one trade you take. Meaning, any individual trade, looked at in a vacuum, so to speak, has essentially a random outcome. This is because there are thousands, maybe even millions of variables affecting a market at any given day at any given time. As a result, a trade really can go either direction, even if you believe you are 100% right about it.
Where your trading strategy or trading edge comes in, is that over-time, given enough trades, if you follow your strategy with discipline, it will play out in your favor. Most trading edges or strategies are simply taking advantage of repetitive market patterns or price action patterns that form because of repetitive human interactions with the market. So, whilst your trading edge might have 60%-win rate, any singular trade has essentially a 50/50 chance of working out. So, don’t start convincing yourself “I’M RIGHT!” about your next trade because you’ll start risking too much and getting too emotionally attached to that trade, which is a recipe for disaster.
Instead, realize and understand that there is something called a random distribution of wins and losses, which essentially means what I described above. For any given trading edge or strategy, over time and over a large enough sample size of trades, that trading edge will show a randomly distributed pattern of wins and losses. So, whilst you do need confidence in your trading ability and chart reading skills, you cannot afford to becoming convinced you are ‘right’ about any one trade and you must always remember that ANY trade can be a loser. For more on this topic, checkout my article on trading legend Mark Douglas.
Myth: You need a high-percentage of your trades to be winners to make money
Truth: You don’t have to win a high-percentage of your trades, you must maximize your winners instead…
You’ve probably heard of risk reward ratios, but do you really understand their power? You don’t need to win all your trades to make a lot of money in the market, in fact, you don’t even need to win most of your trades! How is that possible you ask? By understanding and effectively utilizing risk reward ratios.
Let’s say you set a risk reward of 1:3 for every trade you take. That means, you risk 1R where R = dollars risk to make 3R or 3 times your dollars risked. At this risk reward ratio, you only need to win 25% of your trades to breakeven and about 27% of them to make a profit (after commissions / spreads).
Let’s take 100 trades. Say you lose 70% of them that would be 70 out of 100; you have lost 70R which for examples sake we will say is $700 or $10 per trade ($10 = 1R). Now, if you have a 1:3 risk: reward, you are making $30 on all your winners, but you only had 30 winners, right? However, that is still $900 in profit! So, you lost $700 but made $900, profit of $200 even though you lost 70% of the time!
Risk reward ratios: You only need to win 27 – 30% of the time to make money if your winners are 1:3. With a 1:2 risk reward you only need to be right about 35% of the time. Traders get caught up in trying to win on every trade, but this is a fool’s game, very stressful / time consuming and simply not possible.
A 50%-win rate, which is totally possible if you’re a master of price action, can make you a very large sum of money each year by trading with a 1:2 or 1:3 risk reward. Most traders believe they must win at a very high percentage, but it’s simply not accurate and not conducive to a proper trading mindset.
Myth: Automated trading robots or indicators (systems) are the ticket!
Truth: Not if you want to succeed long-term or on any level of magnitude…
All you need to do is read some of the Market Wizards books and you will quickly realize that most of the world’s greatest traders are not buying Forex trading robots and simply loading them onto their computers and getting rich. This pipedream sold by computer programmers who know almost nothing about how to read the charts, is a huge trading myth.
Any fully mechanized trading system or algo-trading method is going to fail over time. Trading conditions change frequently and even rapidly. It takes an experienced, educated and skilled human mind to discern between good trading conditions and bad. If trading was as easy as installing some software on your computer and pushing the buy or sell button when the software tells you to, everyone would be a billionaire.
Think about the most famous traders and investors you know: Warren Buffet, George Soros, Paul Tudor Jones, any of the traders in the Market Wizards books; they are using their minds not trading robots. Don’t fall for the hype, learn to trade properly and then use your mind to make trading decisions.
