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2024/05
Top 10 misconceptions in trading you must avoid!
In the trading market, certain misconceptions often affect investors’ thinking, hindering our ability to profit and leading to investment failures, self-doubt, and even a loss of confidence in the market. Today, we will introduce ten common misconceptions in trading.
1. Trading is very easy
Many newcomers to the market believe that trading is easy. They think reading a couple of books and spending a few hours watching candlestick charts will lead to daily profits.
Some even think they can replicate others’ successful strategies and achieve the same success. This is a common misconception. Mastering trading is not easier than mastering any other profession; it requires time, money, and a lot of practice.
2. If I can profit in the stock market, I can succeed in the forex market
The truth is that success in the stock market does not guarantee success in the forex market. There are significant differences between stock trading and forex trading.
- First, the forex market is open 24 hours daily, requiring substantial time and energy. You can’t sit in front of the computer all day, so you must find the best trading periods.
- Second, the “buy and hold” strategy in the stock market doesn’t work in the forex market.
- Third, we need more information about currencies from company reports and statistics in forex trading.
3. Financial trading is just gambling
While the forex market does have uncertainties, it is not gambling. Success in this market depends mainly on your skills and experience rather than luck.
Investors with a gambling mentality always hope to get rich quickly, betting heavily on one or a few currencies. If they profit, they often get overconfident and keep increasing their stakes until they lose everything.
When they face losses, they tend to go all-in on a single currency, resulting in a complete loss of their capital.
4. The more regulatory licenses a broker has, the better
Having many regulatory licenses only means that the broker is qualified to operate in various countries. It doesn’t necessarily equate to the broker’s credibility.
A client’s account is regulated under one country, and multi-country regulation doesn’t significantly affect the client. The primary concern should be whether the funds are secured under proper regulation.
Suppose the client’s account is registered in one country’s regulatory framework, but the funds are held in another bank. How can that regulation ensure preemptive supervision and post-incident recourse?
5. Take profit as soon as you earn
Initially, you planned an extended position. Two days later, you noticed a profit and happily closed the position. But shortly after, the strong upward trend just began, leaving you regretting not holding longer. If you hadn’t closed the position hastily, you could have earned ten times more.
6. Add more funds when losing
When the market moves against you, many stubbornly believe “it will go back up” and add more investments. However, the losses multiply as the price continues in the opposite direction. Remember: only add investments when you are profiting.
7. Close the best positions first
When the overall market declines, we often instinctively close profitable positions first and then the losing ones (or wait for stop-loss triggers).
This strategy is wrong: if the market starts to decline, the losing positions might incur the most significant losses and should be closed first. Good positions won’t drop as quickly and might even rise again. So, take your time to close profitable positions.
8. You need a lot of capital to profit in forex trading
Having substantial capital doesn’t significantly affect trading itself. A lot of money doesn’t mean you can diversify currencies or change exchange rates (unless you are dealing in tens of billions). You can trade with minimal funds because trading allows for leverage.
9. Following others' signals will lead to success
Many novice traders get burned by unthinkingly following others. This is like shifting the entire responsibility of your actions to someone else. It sounds incredible, but it usually leads to significant losses. Learn to rely on your knowledge and skills. Remember, there are no great followers in any financial market.
10. If everyone says it's good, it must be good
Some people have investment plans and strategies but are influenced by external environments when they start trading. For example, they plan to buy when a particular currency drops but hesitate when everyone sells. Others, without plans, buy because everyone else is buying.
Some aim to buy cheaper, more substantial currencies but keep waiting as prices rise, fearing to enter the market. Eventually, the currency’s price multiplies, and they miss the opportunity.
When investing in the forex market, pay attention to market dynamics, local and international political and economic trends, and corporate performance. Combine situational assessment with technical analysis of currency price trends. You can promptly capture buy or sell signals and take appropriate actions.
