5 Common misunderstandings about trading

There are often some misunderstandings that people have when they decide to become a trader. That is why even people who have PhDs or own their own business can easily lose all their deposits. These people are smart in their niche but when it comes to trading their actions often may be wrong. Here are the most common misleading thoughts (or actions) that lead to a failure. 

1. People risk too much. Despite all the recommendations of professional traders not to risk more than 1% of a deposit per trade, novice traders persistently often open too big trades that often can be called – all or nothing. After a few such trades, the deposit is gone. It’s is simple math. However, it is actually very hard to lose all the money if a trader sticks to a proper money management plan.

2. People expect too much. There are so many ads around the internet these days that promise 100% per month or even more. All these fake ads slowly affect people’s mind that trading can be extremely profitable if you know what you’re doing. On the contrary, trading isn’t that profitable at all. Yes, it is more profitable than bonds’ interest or bank deposits. Especially now, when interest rates set by central banks are at extreme lows, speculating in financial markets looks more lucrative. Look for yourself; you can get 1-5% in a year’s time in a bank deposit or in bonds. Thereby, if you could make this kind of money in a month’s time that’ll be 12 times more profitable than you can get by holding the above securities. But assuming that you can make much more than that is simply wrong. If it could be done there would be success stories. However, there are none of them.

3. People think that efforts always pay off. Trading is not like that. No matter how good the analysis is, the chance that a trade would be a winner would never be higher than 60%. Just like it is impossible to find a trade that would surely be a loser. The chance of a winning is always between 40-60%. It is important, though, to keep your trades closer to 60% to be successful.

4. People think that it is possible to make a living by trading. Actually, it is only possible if a trader has a lot of money to speculate with. If a person wants to make, let’s say, 2000$ / month then he needs at least 40.000$ and a strategy to make those 5% / month. Otherwise, it is impossible.

5. People think that trading a lot brings more profit. Trading often is good only if a trader uses proven strategies on different, uncorrelated markets. Otherwise, it is not that efficient. It is better to use daily timeframes in analysis on different markets like stocks, forex, bonds and commodities. On the contrary, using minute candles on just one market usually leads to a failure. There is only noise in those fast timeframes that just don’t give enough edge to cover commission expenses.

There was a lot of research data that indicates that about 90% of all novice traders lose their money in trading. However, usually, the cause of a failure is one of the above. If a trader is ready for all the challenges that trading involves then he won’t fail. It is not hard to beat the markets. It is just necessary to follow simple strategies. If a trader is ready for it then he’ll succeed. Oh, and one last thing. There is no holy grail. Forget about it.