3 Myths about Forex Trading

There are many misconceptions about Forex trading and trading in general. In this post, I plan to dispel what I consider the 3 most popular myths about trading Forex. Learning the truth about these false beliefs will help you have a more realistic view and expectation of trading. It may also help you make the necessary adjustments in order to become a profitable trader.

Forex Trading Myth #1 - Trading Success is all about having the right Trading Strategy

Having a profitable trading strategy is part of profitable/successful trading BUT it is only part. Money management, mindset and discipline are also just as vital in successful Forex trading.

The same trading strategy can be given to a number of individuals and each individual will produce different trading results. Why is that? Each individuals discipline and their ability to control their emotions and stick to the strategy will vary.

Many unsuccessful traders actually have very good trading strategies but they are unable to execute trades, keep positions open and follow the strategy due to their emotions (fear, greed, boredom). These traders are what I refer to as the Draw-Down Traders. They are willing to trade/follow a trading strategy until they start making losses (hit a draw-down), they then give-up and find another strategy. The cycle below will provide some extra clarification...

The Continuous Cycle of Losing Traders

1. Find/Create/Follow a Trading Strategy. Emotion: Excitement. Thoughts: This baby is a winner!

2. Start Trading the Strategy. Emotion/Thought: Very hopeful

3. Hit a Draw-Down. Emotions: Frustration, doubt. Thoughts: Perhaps this strategy is not so good after-all.

4. Trader becomes Discouraged and gives-up. Thoughts: I need a better strategy.

5. Cycle starts again i.e Find/Create/Follow a Trading Strategy. Emotion: Excitement. Thoughts: This baby is a winner!

forex trading cycle

The "Cycle" of Successful Traders

1. Find/Create/Follow a Trading Strategy. Emotion: Excitement. Thoughts: This baby is a winner!

2. Start Trading the Strategy. Emotion/Thought: Very hopeful

3. Hit a Draw-Down. Emotions: Frustration, doubt. Thoughts: I expected this would happen and I will trade through this draw-down.

4. Starts making money again and becomes a profitable trader.

5. End of "cycle"

Forex Trading Myth #2 - Trading is a Consistent Income

Nothing can be further from the truth. In fact, trading is the opposite - it is not a consistent income. Even traders that testify of 6-7 figure profits are not making money consistently. There are days, weeks and months that traders make a lot of money. There are also days, weeks and months that traders lose a lot of money. Overall though, the trader is profitable.

The equity curve below is a good example of a traders performance. The x-axis is the amount of traders. The y-axis is the ROI. Do you notice periods (some of them very lengthy) that the trader is not making any money? Do you notice periods that he or she is losing money? The video at the bottom of this post provides more examples and provides better clarification.

Forex trading equity curve

Forex Trading Myth #3 - Trading allows you to get Rich Quick

Trading is very financially rewarding but it takes a lot of time and capital to be earning big - just like any business or venture.

Most believe that making lots of money from trading is about how profitable a trading strategy is. Actually, making lots of money from trading is about how much capital you have. Once you have a trading strategy and are able to stick to the strategy, your income will grow as your capital grows. Developing more profitable strategies or trading more markets is generally not the answer to producing higher monetary profits. In fact, sticking to what works and adding more capital is the best way to earn more. Though having a strategy that earns an average of 5% per month is better than a strategy that earns 2% per month.

Look at the examples below...

Trader #1 - Trading Capital $10,000

Average ROI percentage per month 12%

Average ROI per month $1,200

Trader #2 - Trading Capital $100,000

Average ROI percentage per month 4%

Average ROI per month $4,000

Though trader #1 has a trading strategy that returns 3 times that of trader #2, - in terms of percentage - trader #2 makes $2,800 a month more due to the larger amount of capital.

3 Myths about Forex Trading Video

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