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3 Dangerous Myths About Trading that Could be Affecting Your Profitability

The world of finance and investing is filled with opinions, news, jargon, and sometimes pure nonsense. It is only the people who actually make trades, who will be able to tell the truth from the lies.

After all, an opinion has no consequence. People can quip about what they think is true, if there is no money on the table. However, when you’re trading with your own money, you’re forced to confront the reality of things. I, for one, am no stranger to taking risks, but I only take calculated risks with a high payoff. That is what trading is all about.

Without further ado, here are 3 dangerous myths that could be wrecking havoc on your trading account:

 

MYTH #1: TRADING WITH LEVERAGE INCREASES YOUR RISK
(Reality: Trading with leverage reduces capital required, but risk can be kept the same.)

Let’s tackle the myth first; the media handles the idea of leverage very poorly, because it often sensationalizes the trader who over-leverages and blows everything.

The idea is simple: I have $100, and I leverage so that I can trade $500 or $1000 of stock/forex. I make one bad trade, and I’m wiped out.

This is true for the person without proper risk-management. After all, the temptation of leverage is to dump all your money into one trade, max out the leverage, and hopefully you make 500% on one trade and can call it a day. The truth is, these lucky trades do happen in reality. Eventually, the trader with his newfound wealth (and greed), piles his money into another trade, and loses everything.

Leverage kills the person who abuses it. It’s like fire; it can cook food for people, or it can kill people.

 

Leverage, in practice, actually keeps you disciplined. In forex trading, maximizing leverage is actually a wise way to start trading. When you leverage, you are actually committing less margin to a trade, and you can get comfortable with trading by committing as little margin as possible. Here’s what I mean:

For example, suppose you have a stop loss of -$10 and a target profit of +$30, and you make a trade of unknown size X.

1:100 leverage – Margin committed for X lots = $102.50 (I’m making this up)

1:500 leverage – Margin committed for X lots = $20.50 (five times smaller)

In the case of higher leverage, you stay comfortable because even though the stop loss is -$10, you see that the margin committed on your account is only $20.50. This allows you to not have to see the wild fluctuations in margin requirement, and keep you trading small and trading often.

There are several benefits to leverage that most people don’t know about.

Also, trading with higher leverage allows you to take multiple positions with little capital. This is great for beginning traders who want to experiment and take multiple trades with a small account. With as little as $500, you can take 3-5 forex positions with leverage, risking anywhere from $5 to $20 or so for each trade. This is a great way to start for aspiring forex traders.

 

MYTH #2: BROKERS ARE OUT TO HIT YOUR STOP LOSSES
(Reality: You get stopped out because of the market, not because of the broker.)

Many people who have been trading for some time get convinced that the broker wants them to be stopped out of their positions. I’ve heard of this and seen it happen; the trade hits your stop loss, then immediately goes in your favour and flies in the direction you want, and then you beat yourself up and say “I was supposed to make $XYZ on this trade but I got stopped out because of the stupid broker!”

The truth is, the broker has better things to do than to keep hunting the stoploss on your account.

At least, this is for brokers who want to remain in business over the long-term. How do brokers make money? They make money if you keep trading. Why would any broker want you to stop trading? They would actually want you to be profitable, because for every trade you make, they get a small cut from the spread (also known as the bid-ask spread). Essentially, they want you to love trading and trade so much and so often that they get large revenues from spreads.

Why in the world would the broker want to stop you out? The reason why we get stopped out, is because we are bad traders.

Professionals are buying or selling exactly where your stop loss is placed, because they know that the average investor would place their stop loss there.

The solution to not getting stopped out, is to first acknowledge that trading involves some positions getting stopped out. Being right 40-50% of the time is already sufficient for you to be profitable, so don’t be surprised if half your positions get stopped out.

One example is a sideways market. Beginners love to enter on sideways markets because it presents many signals in both directions. However, professionals are buying and selling at the extremes of the sideways markets, causing beginners to get stopped out repeatedly, while professionals make money repeatedly. Remember that there is another trader on the other side who is filling your order; if you are losing money, it is because someone else is taking money from your account, and putting it in their account.

MYTH #3: FOREX IS MORE RISKY THAN STOCKS
(Reality: Risk is independent on the product, and forex actually requires less capital.)

In a previous blog post, I mentioned this: If you have $500 to invest, it actually makes more sense to trade forex.

In the Forex market, you can ‘get a feel of the game’ by risking a few dollars per trade. By trading the smallest lot size (0.01 lots), you can learn to make a few dollars here, lose a few dollars there, and rack up trading experience and learn to trade ‘live’ without incurring hefty losses. By learning to make many decisions and experiencing all the different conditions of the market, you would become seasoned enough to trade a bigger size, and fine-tune your own trading strategy to become profitable in the long-run.

Many traders discover they have certain characteristics about themselves that hinder success. In trading a ‘live’ account with a small sum of money, they are putting in some skin in the game, and getting used to the ups and downs of their account. The best part about forex is that there are no commission charges, making the ‘tuition’ fees a lot less than trading in stocks.

I’ve spoken about this at length in my previous blog posts. Besides the lower cost of trading forex, you actually lower your risk by getting better at trading. After all, the biggest risk is yourself. If you’ve got skin in the game, made a few hundred trades with real money, and got yourself a strategy that you can rely on, you are actually a lot less a risk to yourself.

24/7 market; choose when you want to trade.

The great thing about Forex is that you can decide when to trade based on your schedule. That helps people who have punishing schedules: trading in the middle of the night, or during lunch, on a daily basis, works out to a trading schedule that accommodates your lifestyle needs.

Stocks have bigger gaps between bars than Forex does.

Furthermore, with regards to stocks, stocks tend to see bigger gaps between days. Here’s what I mean:

forexForex pairs/currency futures tend to have less gaps between bars; bars close and open at roughly the same price. Here, the chart of NZDUSD (daily).

stockMost stocks have gaps between the candlesticks/bars. Notice how there are many ‘holes’ between bars for First Majestic Silver Corp (NYSE).

Gaps make the analysis a little more complex, because you have to take into account the size of the gap along with the actual candlestick printed on the chart. Forex allows you to employ technical analysis more simply, and learn how to read price action without the distraction of having to figure out what the gap means. Of course, this isn’t a problem among more liquid stocks like the SPY, C, MCD, FB and other “famous” counters.

WHAT’S THE REAL RISK?

The real risk in trading lies with the trader. The moment you stop improving, stop learning, stop growing, or stop challenging yourself, you’ll start to see your profits suffer. I encourage all of you aspiring traders to seek the truth, and rely less on opinions in your trading journey. After all, you can only find out the truth when you’ve got some money on the table, and actually start to make trades.

10 Essential Trading Rules of Professional Traders, Especially Number 2!

Have you ever wondered how professional traders see the market differently?

How do they continue to make exceptional returns day after day, while 90% of retail traders lose money on a daily basis?

Here are my top 10 trading rules I developed, after over 10,000 hours of trading professionally, and I hope that this will help you take your trading to the next level.

Good luck! 😀

Professional trading 4

1. Always be disciplined

  • Follow your plan and rules
  • Do not be swayed by your emtions to act otherwise
  • Do not create excuses to break the rules – this time is NOT different

2. Plan the trade, trade the plan

  • Always cut your losses according to plan
  • Always cut your profits run according to plan
  • Separate your planning from your execution

3. Expect losses

  • Losses are part of trading – accept them. This will reduce emotional resistance when the time comes to do so.
  • Do not take a trade unless you are willing to accept the risk (possibility of loss) that accompanies the trade
  • Accept that you willlose money on some trades
  • Take your losses easily when they come
  • Do not be stubborn and bend your rules

4. Manage your emotions

  • When i doubt or unsure, get out!
  • Always analyze objectively
  • Clear all positions to have a neutral frame of mind
  • Do not act based on greed or fear

5. Focus on trading well

  • The goal of a trader is to make the best trades
  • Money will naturally follow
  • If you focus on money, emotions will get in the way and you will not be able to make the best trades

6. Do not overtrade

  • Be patient. Do not rush into a trade.
  • Do not trade when there are no good setups
  • Do not try to be in the market all the time
  • It is better to miss a boat, than to leave on one full of holes
  • One good trades is better than three bad trades
  • “There is a time to go long, a time to go short,and a time to go fishing.” – Jesse Livermore

7. Trade what you see, not what you think

  • Don’t concern yourself with why things are happening
  • Observe what is happening, and act on it
  • Ignore the noise – tips, rumours, news, speculations, etc
  • Anticipate the future, but trade in the present
  • Markets are never wrong, opinions are

8. The trend is your friend

  • Don’t enter just because it looks “overbought” or “oversold”
  • Don’t try to catch a falling knife
  • The easiest money is made trading with the trend
  • Make sure you have an edge before you enter the market
  • Put as many factors in your favour as possible

9. Do not repeat your mistakes

  • Keep good records of your trades and thought process
  • Analyze your mistakes, then move on
  • Do not make the same mistake again
  • Continuously improve yourself

10. Have realistic expectations

  • Do not try to make stellar returns overnight
  • Aim for small consistent returns over a period of time
  • Do not expect to become an expert overnight
  • Trading takes time to build experience

Download free e-book: The 7 Best-Kept Secrets of Professional Traders

For more tips on how to take your trades to the next level, download a free copy of “The 7 Best-Kept Secrets of Professional Traders”.
http://synapsetrading.com/resources/the-7-best-kept-secrets-of-professional-traders/

WANT TO START LEARNING HOW TO TRADE PROFITABLY?

Spencer will be sharing his roadmap of how he grew a small trading account to a multi-million dollar portfolio of diversified assets, including stocks, bonds, real estate and 10+ businesses. If you are keen to start building a second source of income (besides your job) to fast-track your first million, I would like to invite you to join us for our next workshop, where you will learn how to multiply your capital using a handful of safe and simple strategies, with as little as 15 minutes a day.

Click here to register: http://wp.me/P1riws-6WU

The Quest for the Holy Grail: Secrets, Gurus & Software

To many, the holy grail of trading is deemed to be the ultimate solution to all their trading problems, the magic bullet that will allow them to profit without effort, the secret trading method or tool that will allow them to predict the market and win on every trade. However, far from being the solution, this mentality often acts as a stumbling block to all traders, if not a brick wall.

Many people hop from tip to tip, from guru to guru, from one software to another, attending every seminar and learning from every guru, but they will never be contented, and they will never become good traders, because they are too busy finding the holy grail to put their knowledge into practice. So what is the holy grail?

The Quest for the Holy Grail: Trading Secrets, Gurus & Software

The Quest for the Holy Grail: Trading Secrets, Gurus & Software

To them, the answer is always so near, yet always slightly out of reach. Every time they see a new method, they think “this must be it, this must be the missing ingredient.” They test it out for a few days, realise that it’s not perfect, then skip off to find the next new toy. Many don’t realise that no method is 100%.

Many people also mistake sophistication for perfection, opting to fork out money for automated systems that will print money for them as they sleep at night. However, when the system stops printing money, as all do eventually, they are once again off to find the next holy grail.

It took me 7 years to realise it, and I have been through at least 200 books and tried almost every method or tool available, and I finally realised that to find the holy grail, one has to look within. So if you want to start learning the skills to make consistent money on your own, you need to first get rid of this stumbling block.

If you want to learn to trade, it make sense to learn from someone who is trading in the current markets. Not someone who was successful trading 20 years ago and now teaches for a living. Will their strategies that worked 20 years ago still be relevant now? It is unlikely in this current dynamic market.

Many people in trading start off with the wrong ideas, and after sacrificing a lot of time and spending a lot of money, they wonder why they still cannot get the results they desire. Others think that hard work can solve everything, and given enough time, they will naturally pick up the skills themselves. Not many succeed in re-inventing the wheel. As a world-class tennis coach used to say, “Practise makes perfect, so make sure you are not practising the wrong thing.”

“It’s not the method or system, it’s the trader.”

Warning to Beginners: Avoid the Indicator Trap

It is easy to see why retail traders find indicators appealing because of their ease of use and clear-cut signals. In fact, many new traders think they know all about trading because they have learnt a few basic indicators that generate simplistic buy/sell signals. This kind of thinking is dangerous because it shuts them off from learning real trading skills like price action and behavioral analysis.

Warning to Beginners: Avoid the Indicator Trap

Warning to Beginners: Avoid the Indicator Trap

 

What are indicators and how are they derived?

There are only five pieces of information we can get from charts: the open, high, low, close and volume. A skilled trader can interpret this in terms of market behaviour of psychology instead of processing it as a bunch of numbers. Indicators, on the other hand, attempt to use shortcut calculations to give meaning to these numbers. As a result, they can never be faster than reading the actual raw data. Manipulating data may also mask its information quality and granularity, causing you to miss out essential essential details.

Do professionals use them?

The answer is minimally. If you go to any bank/fund or professional trading arcade, and observe the traders who trade there, you will notice that their charts are mostly blank. This is not coincidence, because such a chart setup is optimised for reading price action, with as little distractions as possible. If you don’t believe me, go check it out yourself. As said by the famous Leonardo Da Vinci, “Simplicity is the ultimate sophistication.”

The dangers of using indicators without real trading skills

Many traders, especially beginners, are drawn to indicators, hoping that an indicator will show them when to enter a trade. what they don’t realise it that the vast majority of indicators are based on simple price action. Oscillators tend to make traders look for reversals and divergences, and when the market is trending strongly (best chances to make money), they will be repeatly entering counter-trend and losing money. By the time they come to accept that the market is trending, it will be too late to get a good entry to recoup their losses. Instead, if you were simply looking at a blank chart, it would be obvious when a market is trending, and would not be tempted by indicators to keep looking for reversals.

Common heuristics such as “buy when this line crosses this line” or “sell when this is in the overbought region” are some overly simplistic ways of using indicators. Trading in this manner does not give you any understanding about the market. It does not answer the “why” question, such as why this line crossing that line generates a buy signal. Quite often, one may also get conflicting signals from different indicators, and without an understanding of price action, one has no way of resolving the conflict.

Are indicators really needed for your decision-making?

Some pundits recommend a combination of time frames, indicators, wave counting, and Fibonacci retracements and extensions, but when it comes time to place the trade, they will only do it if there is a good price action setup. Also, when they see a good price action setup, they start looking for indicators that show divergences or different time frames for moving average tests or wave counts or Fibonacci setups to confirm what is in front of them.

In reality, they are price action traders who are trading exclusively off price action but don’t feel comfortable admitting it. They are complicating their trading to the point that they certainly are missing many, many trades because their over-analysis takes too much time, and they are forced to wait for the next setup. The logic just isn’t there for making the simple so complicated.

So… Should I be using indicators at all?

The best solution for the retail investor would be to first master a firm foundation of price action and behavioral analysis, and subsequently, should he choose to use indicators, should remember that as their name suggests, they are not “entry/exit signallers”, but merely “indicators”.

Therefore, it is a matter of how you use indicators, and one should always keep in mind that indicators are there to aid you in reading the price action, and not act as a substitute for it. You can think of indicators as the training wheels of a bicycle – you will want to remove them once you learn how to ride properly.

Trading always involves uncertainty, and trying to find comfort in the certainty of indicators will lead to constant indecision, second-guessing and parameters-tweaking.

The Time Element – Choosing the Correct Timeframe

Every trader knows that using multiple timeframes can provide different perspectives on the market, and provide key information on the lead-lag relationship. Small timeframes lead larger ones, and larger ones drive the smaller ones. Understanding the inter-play is crucial.

The Time Element - Choosing the Correct Timeframe

The Time Element – Choosing the Correct Timeframe

Since trends exist on different timeframes, it makes sense to analyse at least two timeframes. For example, if one’s main timeframe is the daily chart, one can consult the weekly chart to see the big picture. This allows investors to analyze a particular trend against the perspective of the next higher timeframe.

If one is using swing counts, a lower/higher high/low in the weekly and monthly charts can provide perspectives not seen in daily charts. Long-term trendlines may be clearer, and more obvious/easily visible. Certain price patterns are more visible on long-term charts (key reversals, triangles on weekly), as well as long -term support and resistance levels.

A trend change signal on the short-term (daily) may only be a retracement in the long-term (weekly) chart. On the other hand, a trend change signal in the long-term chart may be a substantial move in the short-term even though a short-term move may seem overdone. Hence, an overdone breakout on the short-term trend may actually be the start of a major breakout if the long-term chart is still on an uptrend.

Divergence signals are also more obvious when timeframe is compressed, for example a price-volume divergence is more obvious on the weekly compared to the daily. Divergences on the larger timeframes also point to larger moves, and could herald major reversals.

In conclusion, using multiple timeframes allows one to better identify trends, and more precisely pinpoint entries and exits by zooming in and zooming out from the initial point of reference. This also allows one to better manage risk in line with one’s time horizon and investment timeframe.

The Dual Timeframe Technique (NEW!)

This involves using 2 different timeframes to trade, one to provide the roadmap and the other to time the precise entries and exits.

Strategic Timeframe: This timeframe acts as a roadmap for the execution timeframe, giving you an idea of longer-term trends, hence providing you strategic direction on how to select your setups and manage your trades.

Execution Timeframe: This is your main timeframe for trading, and will be what you are looking at as you decide on your stoploss, entries, and exits. The focus is on precision and timing, so this timeframe is like zooming in from your strategic timeframe.

For example, for my strategies, I use:

Strategic Timeframe: Weekly chart
Execution Timeframe: Daily chart
Expected holding period: Can last for a few days to a few weeks (if the trend is strong)