A few Forex trading myths; discussed and debunked - Part 1

Whether we discover the activity of retail forex trading by accident or design, we’re social animals and in the social media world we now inhabit, we’ll eventually discover forums and other social media methods, to share and discuss our trading ideas. As we discover forums and other discussion venues, we’ll note that certain biases take over. A form of group think eventually develops and overcomes certain subjects; “this works, this doesn’t, do this, don’t do this, ignore that, pay attention to this”...

This group think can become extremely pervasive and persuasive and at times, if enough participants support a particular idea, or are persuaded by certain authoritative contributors to do so, then you could be forgiven for believing that black is in fact white and up is down. If someone attempts to swim against the tide of opinion, even if they’re right, they can be met with a volley of invective, particularly if they’re new to the debate.

Entries are more important than exits, or vice versa

Novice traders will be fixated on their entry strategy, perhaps it’ll be a combination of technical indicators which, when they align in perfect unison, produce the perfect signal to enter. So what happens next? When do you exit, where’s your target price, what risk are you taking per trade/where are you placing your stop?

Anyone can point to the current leader of a race, no one with any degree of certainty, can predict who will win the race when it’s half way through. Exits rank equally in importance with exits, which also rank equally with our overall trade management. We have to have a reason to enter the market and we have to have a reason to get out. What gets us in might get us out; the entry signal may be identical (in reverse) to the exit signal.

It’s impossible to predict price direction

Yes and no, if our forex markets were perfectly predictable then it wouldn’t be a market, it’d be a tap of money we could turn on or off at will. We can make reasonable judgments based on, for example, historical evidence, recent patterns displayed on our charts, fundamental and technical analysis. Based on those reasonable judgments we should be able to deduce where price may be headed over the short to medium term. Our prediction of where price is headed, doesn’t have to be a coin toss, it can be based on the tools and the science available to us.

High win rates guarantees success

A higher win rate doesn’t necessarily translate into profitability, if we win six out of each ten trades we take, lose three and break even on one, but our losses are twice or more our gains, then we’ll at best effectively standstill, or lose money. As stated many times; even a 50:50 win/loss rate can be effective if we gain, for example, €200 on each winning trade, but only lose €100 on each losing trade.

High risk rewards will gain more profit

We have to recognize what’s probable, what’s possible and what’s highly unlikely and build our strategy according to such phenomena. For a forex currency pair to move 1% in a day isn’t a regular occurrence. It may only happen once a week; on the basis of a fundamental calendar release missing or beating forecast, or an outlier political event taking place. Therefore, expecting to operate a day trading strategy each day, to gain from a 1% market move if we trade one currency pair, whilst employing only a 0.5% risk, is over optimistic. We have to trade in tune with behavior and we know that markets range more than they trend, therefore a 3% market move inside perhaps a month would be significant, so could we consider risking 1.5% of our account size to try to gain 3% growth, or should we be risking 1:1?

Only experimentation will reveal our comfort level, but statistically no evidence exists that greater risk will equal greater reward.