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6 Myths You Should Know Before Jumping Into The Forex

1 year ago
Forex Blog

No matter what, Forex is always a hot topic since long. Everybody wants to indulge themselves in the forex industry and earn a handsome amount. But before jumping into the industry here are some myths that every trader must know, which many of the brokers don't tell you about. Some of them you already might know, but we decide to give more simple and clear explanation for those who might be scared off by the technical details.

Read and let us know what you think about these myths in the comments below:

Win and Win Situation (100% profitability)

The word "Trading" itself means "the action or activity of buying and selling goods and services." As defined by Google. Hence losses and profits are inevitable product of forex trading, and every trader may encounter them. Unfortunately perfection can never be achieved, and even the high value trader loose the money. There are thousands of anonymous participants in the market. Each of them has his/her own goal that you cannot know beforehand. The trader is at fault only when he is not self-disciplined about his goals, regardless of the outcome of trade.

A good system can be transferred to different timeframe, and still remain profitable.

Markets may be "fractal" to some extent, but the price patterns on long-term are qualitatively different to those on short-term ones. This is likely caused by such factors as macroeconomics, liquidity needed by heavyweight players, relative effect of news announcements, session considerations, etc. You can't change strategy's timeframe and expect it to work with the same result.

You shouldn't push your Luck

So far there is no scientific proof that if you've made profit, you are less likely to make it next time. Quitting only because you earned profit (to avoid "pushing your luck") is based on superstitious fear. Millions of traders get profit and loss every day, market won't change its behavior because of one trader.

To put it simply, there are same chances of your gain increasing or decreasing, just like at any other time. Market behavior and probabilities are not going to change merely because you had a winning or losing streak.

Always Focus on One or Two major pairs.

It works for some people, but most of experienced investor's advice to diversify your portfolio. This helps to manage the risks and also useful in trading.

For example, pairing the most negatively correlated currencies (the strongest against the weakest) delivers the best probability of catching strong, clean moves.

For example if GBP/USD and USD/JPY are both trending upward, then GBP > USD > JPY, and hence GBP/JPY will be trending upward even more steeply.

Adding more filters to a chart will improve your trading

All indicators are derived from the price (and, in some cases, the volume). It means that adding more indicators to the same timeframe will not necessarily provide independent confirmation, nor add value. Ultimately one will have to enter a trade on some candle, and one can enter on an earlier or later candle by simply re-calibrating any existing indicators.

Non-linear indicators (which aim to reduce lags and overshoots without compromising smoothness) are not necessarily superior to conventional indicators. Attempting to enter the market earlier may lead to the entry catching a minor correction in the trend, rather than the desired full-scale reversal.

All price movements are random

Many traders and analytics struggle over this thought at some point. Sometimes it seems that whatever you do, the market will stay unpredictable. Many people have fallen into this trap of thought, but we will stay rational and try to analyze what it would mean if this were true.

Imagine that all types of analysis would be useless, all systems would have a long term expectancy of zero, all P/L would be completely random and all traders would eventually lose. This sounds terrible but at the same time not realistic.

Many proficient traders already know it's not true, but let's gather some evidence of non-randomness for those who have doubts:

  • The large price spikes that happen after news announcements.
  • The price stabilization/profit taking that tends to occur after some rapid moves of the market.
  • Traders tend to place their stops just outside swing points.
  • That volatility frequently shrinks significantly as the market awaits a big news announcement and etc.

However, the fact that non-randomness exist doesn't automatically mean that it's always possible for the trader to exploit them profitably. Spikes that occur the instant that red news is announced is one such example.

The statement that "All Price Movements Are Random" is false. It is proven and mathematically possible to profit systematically from trading. What might look like randomness, at first sight, is probably just a lack of information or knowledge.

So use your knowledge and follow your goals and earn a handsome amount.

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