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It's remarkable that there have been so many myths and misconceptions in the trading business for so long. When you listen to traders talk, it's easy to believe that those misconceptions have become "common knowledge" in the trading world.
This article debunks the top ten trading myths, explains why they're wrong, and explains why believing them might really harm your trading.
Top 10 Common Trading Myths:
1- Trading without a stop loss is better
Trading without a stop loss as a spot trader is bad on many levels. Trading without a stop loss should be avoided at all times since you cannot control your position size, you cannot perform sound risk management, and you are only one trade away from losing your whole trading account on a single trade.
The biggest reason traders don't employ stops is that they assume their broker would look for them. You won't have to worry about stopping hunting if you choose a legitimate and licensed broker.
It's far more likely that you're simply stopping where everyone else is stopping, making it very easy for the professionals to crush you. Never trade without a stop loss.
2 – Leverage is bad
There is a discussion about leverage going on between traders at all hours of the day. But what is it about leveraged trading that makes it such a contentious topic? The answer can be found in the previous paragraph.
Leverage, in essence, is neither good nor bad; it is simply a tool and a mechanism. Ignorance and a lack of expertise are what make leverage trading dangerous.
Trading with a lot of leverage and big position sizes might be a recipe for disaster. When pricing moves against you and you use leverage, a modest loss can quickly develop into a large loss, wiping out your account.
3 – Trading with a reward-risk of 1:1 is gambling
When you have a reward-to-risk ratio of 1:1, your winning and losing transactions are of the same magnitude. It does not, however, indicate how many wins and losers you have.
Even with a reward-to-risk ratio of 1:1, you will gain money if you have 60 successful trades and 40 losing transactions over the course of 100 trades.
If the other parameters of your trading match, a method with a reward-to-risk ratio of 1:1 can be quite profitable. With a historical win rate of better than 50%, you can even have a reward: risk ratio smaller than 1:1 and still make money.
4 – Trading with a win rate of 50% is gambling
A 50% win rate indicates that you will have the same number of winning and closing transactions, but it says nothing about the size of your winners and losers. Even a win rate of 50% will make money if your victories are somewhat larger than your losses.
Some of the most successful traders have trading strategies that have a win rate of less than 50%, but their winning transactions are far larger than their losing trades. Never evaluate a trading strategy just on the basis of its win-rate!
5 – Higher time-frames are easier
Higher time frames aren't any easier to trade, and neither are lower time frames. The timeframes you choose are entirely up to you. If you don't have the necessary skillset, trading greater time frames can be the most difficult thing you've ever done.
Lower time periods may be more profitable if your strengths are focused on quick execution and emotional stability.
In trading, a "one size fits all" recommendation does not work. You must determine what works best for you and conduct a self-audit. Following generalisations and believing misconceptions almost always leads to poor trading results. You must determine for yourself what works best for you.
6 – You can start trading with $100
You could theoretically start trading with $100 these days. With so much leverage available, some brokers even represent themselves as having a $100 trading account. Trading such small accounts, on the other hand, should be avoided for a variety of reasons:
With small accounts, it's impossible to use an appropriate position sizing and risk management strategy. On a $100 account, a 1% stake size is $1. When you're only betting $1, how serious can you be?
And how probable is it that you'll end up with a $2 or $3 loss by manipulating your stop-loss order? It may not seem like much, but you've simply elevated your risk by 100% and 200%.
Traders with overly few trading accounts are more prone to participate in risky trading, become undisciplined, and engage in gambling-like trading. Later on, it's really difficult to unlearn those bad habits.
7 – Justifying bad trades with a high reward: risk ratio
How many times have you told yourself that it's okay to take a trade that doesn't satisfy all of your criteria but has such a high reward-to-risk ratio that it's worth it!? It's a popular practice to justify terrible bets by citing a possibly high reward-to-risk ratio, but it's also a lousy one.
The only aspect of your trade that you can control is the risk and the amount of money you will lose, which you can accomplish by using a stop loss and proper position sizing. You, on the other hand, have no control over the possible consequence.
A high reward-to-risk ratio says nothing about the transaction itself, and if it doesn't satisfy your requirements, you're just getting into a terrible deal with a higher chance of losing – regardless of the potentially enormous return.
8 – Screentime will help you become better
Simply gazing at a chart will not make you a better trader. Getting better at something doesn't happen by doing it, but rather by practising, preparing, and analyzing it.
A soccer player does not enhance his talents by playing 90 minutes every weekend, and a tennis player does not increase his skills by playing a few sets against an opponent. It's the same in trading; you don't become a better trader by placing trades; you only become a better trader by preparing, reviewing your performance, and actively working on your edge and trading.
Don't waste your time staring at a computer screen. Make an ongoing effort to plan your trades ahead of time, build a detailed trading strategy, set alerts during trading sessions so you don't have to monitor charts, and then complete a thorough post-trading analysis in your trading notebook.
9 – Indicators don’t work
When it comes to using and interpreting indicators, the majority of traders are clueless. Buy and sell signals are not provided by indicators. Indicators simply take the price data displayed on your charts, make calculations, and display the results.
When a trader realizes that the goal of an indicator isn't to generate buy or sell signals, but to convert price data into a format that's easy to grasp, he can use indicators far more successfully.
It is your responsibility as a trader to analyze the indicator data; it is not the indicators' responsibility to forecast price movements.
10 – You should never risk more than 1%
This is yet another generalization, and generalizations, as is often the case, are rarely correct. The 1% investment size is justified by the fact that you are "unconcerned" about prospective losses.
Is that correct? But why can't you be unconcerned about a 2%, 4%, or 6% loss? Isn't how effectively you handle risk more of a personal matter.
The ideal position size is determined by a number of criteria as well as personal preferences. Your system's win rate indicates how common losses and repeated losses are; the average reward-risk ratio indicates how quickly you may potentially recover from drawdowns, and your own risk tolerance indicates how well you can endure (big) drawdowns.
Again, a one-size-fits-all approach rarely works, and you must assess yourself and your strategy.
End
Do you know of any other legend that has persisted for centuries, and traders have simply accepted it as fact? Please discuss it with us by leaving a comment below and always be aware of this trading myth.
