Updated from its original posting on 2013-05-03
Which among these three forex misconceptions are you most guilty of? It’s about time we busted these trading myths!
1. “I’ll succeed if I work hard enough.”
Perhaps we have films like Rocky and The Pursuit of Happyness to blame for having this fairytale mindset, thinking that whoever watches the forex market 24/7, takes the most trades, and gives up his entire social life, will be rewarded with a happy ending.
It’s unfair, I know. But that’s how life works. Think about it. What do you think is the proportion of artists and athletes who dedicate so much time to their craft but still find that they couldn’t live off their careers? The markets reward not those who only work hard but who also works smart. It’s possible to make a living out of forex trading, but one has to be consistently good at it.
To be consistently good at forex trading you need to develop your skills and stay disciplined. This means that you have to work on things that you can control (consistency of preparation, getting educated, reviewing your trades, etc.), so stop depending on good karma to reward you with pips! For instance, start with your trading journal to figure out what you’re doing right and what you need to improve on.
2. “All I need is discipline.”
Discipline is most definitely necessary to being successful in forex trading, but that’s not all it takes. No matter how disciplined you are, if you find yourself on the losing end most of the time, then you’re probably doing one of the other thousands of things that traders do, or not do, that can trip up your capital.
Trading psychology expert Dr. Brett Steenbarger says that the main cause of trading failure is the lack of an objective edge in the markets. Many forex traders are guilty of taking trades based on random patterns, strategies, or systems without testing those out themselves or without doing proper background research first. It’s like buying a new home without checking out the ‘hood!
Forex traders who have blown up their accounts and lost their hard-earned money aren’t necessarily an undisciplined bunch. It could be that they didn’t dedicate enough time and effort into figuring out which trading style is best for them. They probably didn’t spend time to practice on demo first or backtest their strategies before going live.
Keep in mind that your capital, no matter how huge, is still limited and that it might not be enough to last your learning curve. Learn the ropes and get a good feel of the markets first. That’s what demo trading is for.
3. “Emotion is a trader’s number one enemy.”
There’s no denying that unchecked emotions can take its toll on your forex trading performance. For many traders giving in to emotions means cutting gains early, letting losses run, and even removing stop losses (gasp!). These acts often lead to bigger-than-expected losses and lots of margin calls. But while overcoming emotions is a huge challenge, it’s not the only one out there.
Always remember that trading is a performance field, wherein success is the result of a combination of many, many variables: talent, skills, passion, and discipline to name a few. As with discipline, control over your emotions is a crucial factor but it’s not the only ingredient to success. Mastering forex trading psychology simply dictates how consistent you are with applying your talents and skills, but it cannot replace those factors.