There are numerous misconceptions and incorrect assumptions that surrounding trading. These myths are held both by aspiring traders as well as the public. Not only are they untrue, they are hurtful both to you as a trader and your chances off success but also to the reputation of trading in the minds of the public who know next to nothing about it.
In this article, we are going to dispel 11 of the most common myths of trading and explain to you why they are not true…
Hopefully, after finishing today’s lesson, you will have a better understanding of the reality of trading, what to expect and how to profit from it. Each trading myth will be followed by the truth and an explanation of both:
Perhaps the biggest myth about trading in the general public’s mind, is that it’s all about making money fast. High risk, fast money, fast cars, etc. etc. The stereotypes that surround trading are so widespread that most beginning traders get into trading due to these stereotypes and so they start off with the complete wrong mindset and expectations. These expectations come to a crashing realization once they lose a few trades and reality sets in.
That’s right, trading is about not losing money much more than it is about making it. The reason is, if you want to make money in the markets, you must be a risk manager more than anything, a capital preservationist, if you will. If you want to take advantage of big moves in the market, you’ve got to learn to preserve your trading capital by bidding your time and being patient in the face of constant temptation.
You will be in battle not only against all other traders trading the markets you look at, but also against yourself, which is perhaps the hardest ‘opponent’ to defeat. Once you get to the point where you can preserve your trading capital and only use it on trading opportunities that meet your strict, pre-defined criteria laid out in your trading plan, then you will have conquered yourself and you will start taking money from other market participants rather than giving it to them.
Truth: You don’t need to be super smart, trading is as much skill as it is math…
Guess what? You don’t need to be a college graduate to be a successful trader. Trading isn’t only for some super-genius math wiz who sits there coding algorithms all day. In fact, just like being overly-emotional can be bad for trading so can being overly-analytical. Those who are too analytical tend to over-think and think themselves right out of perfectly good trading opportunities.
Ideally, you want to have a good mix of gut feel and analytical trading abilities. Your gut feel will give you many trading ideas and the desire to take them but your analytical /forward thinking abilities will be the check that keeps your trading in balance. Only when a trade idea passes both your gut feel and your logical, objective analysis should you consider entering it.
The point of the matter is that college degrees, IQ’s and other ‘credentials’ are nothing but background noise to the market. Those who succeed at trading are masters of themselves. Master your own actions and behavior and ability to control them and you will succeed at trading. All the books and an IQ of 180 won’t do you any good if you over-trade or risk too much or cannot remain disciplined.
You don’t have to pick exact market turning points to make money trading like many people think. You do have to read the chart, the story on the chart and understand what it’s trying to tell you. You then look for price action signals that ‘make sense’ with that chart’s story.
In this recent Gold chart, we can see that the story on the chart was this:
An uptrend was in place on the daily chart as seen below. Then, we drew in the key horizontal levels of support to look for signals at. Then, price pulled back to support and formed an obvious pin bar reversal signal there, indicating a long entry was appropriate. You can see what happened next. We are reading the chart and considering the context a potential trade entry forms within, not just trying to pick the exact high or low with no rhyme or reason.