4 Trading Myths That Negatively Affect Your Performance
What Many Traders Believe Is Actually Hurting Them
It may have been a snappy one-liner you read, a trading proverb, or something you heard in passing that stuck with you. You may also believe something because it seemed reasonable at the time and you never bothered to fact-check it. Regardless of the reason, there are plenty of myths about trading (and lots of trading "wisdumb"). Below are four of them. Understanding why they are myths will help you avoid searching for unnecessary information and wasting your time on unproductive paths.
Myth: The Holy Grail Strategy
While not many people openly admit they are looking for the holy grail strategy—that strategy that never loses and picks exact market turning points—behavior shows many people are.
Most winning traders profit on about 30% to 70% of their trades. The average is likely slightly below 50%. What separates winning traders from losing ones is that they make more on their winners than they lose on their losers. Or, they make about the same on winners and losers but win more than 50% of their trades. Some trades do both.
The point is, you won't find a real trader who wins all the time and picks exact market turning points. But you may find a website that proclaims its product can! Such products are typically optimized to the past—created to look good based on what has already happened—but have little value in helping you trade now or in the future.
You don't need to win all the time or pick exact turning points. Just being right 55% of the time, and having winning trades slightly bigger than losses can produce huge returns.
Forget the holy grail; you'll never find it. Instead, find a strategy that wins a bit more than it loses. Be like "the house" in Vegas. They don't win every hand, but a slight edge still equals big profits.
Myth: Instant Wealth/Years of Hardship
There seem to be two dominant ideas when it comes to successful trading:
- You can become rich...and some believe it can be done in a short amount of time.
- You can never beat the market, so don't try. Invest for the long-term and hope to make an average return of 8% to 10% over many years.
Short-term traders lean more toward the first statement, while many investors lean more toward the second.
Short-term trades can earn a good income from the markets, but it isn't easy (only about 4% of people succeed) and don't expect to get rich quick. Expect to put in six months to a year of hard work before your trading endeavors start to pay off with any consistency.
If you dedicate a lot of time to making yourself a successful trader, then you may earn an income from the markets. There is no guarantee you'll get rich from it though.
Myth: The Entry Is the Most Important Part of a Trade
Most traders like to talk about how to get into a trade and spend the majority of their research time looking for the perfect entry. While the entry is important, where you get out is just as—if not more—important. Learning how to take profits deserves as much focus as the entry.
Money management and position sizing are also key. The best entry and exit method in the world mean nothing if you have the wrong position size and end up blowing the account on a couple losing trades.
Every part of a trade is important; don't get too hung up on only one aspect of trading. To be successful you'll need to master it all.
Myth: Complex Strategies Are Better Than Simple Ones
There is a big difference between simple-unresearched and simple-researched. Unfortunately, this traps a lot of traders. Many very simple methods, which sound good in theory, are accepted and passed around despite never being tested for profitability or usefulness.
A simple method may be good but only works in certain market conditions or at a certain time of day. Doing some research and practicing may reveal that a simple method is actually very good, it just needs to be tweaked to your personal trading style.
A complex method may seem better, but if it prevents you from entering or exiting trades when you're supposed to, then it is too complex. The financial markets move quickly—especially when day trading—so you need a strategy that allows you to make decisions quickly. If it is too complex you may be left wondering why it works in theory, but not in the real world.
Regardless of which trading method you use, research and practice it in a systematic way so you can see if it actually works for you.