For many new traders, one of the most common question I get is regarding the method of analysis to use, and it usually boils down to technical analysis vs fundamental analysis.
Technical Analysis (TA) gives you a fast and simple way to scan through data, find good opportunities, and make a trading decision.
Fundamental Analysis (FA) helps you understand the big picture and why prices are moving in certain ways.
Personally, I find that the best approach is to combine them to get the best of both worlds.
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.
If you listen frequently to the mainstream media, or take advice from friends and family who are not traders themselves, they might give some good-intentioned but ill-informed advice, which could harm your trading results.
Such dangerous myths about trading might seem to be “common knowledge” because they keep getting repeated frequently, but have you stopped to consider whether they are really true?
Here are some common myths:
Trading is very risky because you can lose all your capital
You need to trade very often if you want to make more money
You need to monitor prices and charts 24/7
Brokers are out to hunt your stoploss
Do these sound familiar?
Today, I will tackle 3 of the most common myths.
MYTH #1: TRADING WITH LEVERAGE INCREASES YOUR RISK
(Reality: Trading with leverage reduces capital required, but risk can be kept the same.)
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 though, 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, using leverage is actually a standard practice. When you use 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 your trading size small.
Also, trading with higher leverage allows you to take multiple positions with little capital. 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 only 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 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 easily make many trades and rack up trading experience by “trading 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 fixed commission charges (stocks tend to have a fixed minimum fee regardless of trade size), making the ‘tuition’ fees a lot less than trading in stocks.
Another great thing about forex is that thee market is open 24/7 on weekdays, so you can decide when to trade based on your schedule. That helps people who have busy working 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.
Lastly, with regards to price movements, stocks tend to see bigger gaps between days. Here’s what I mean:
Forex pairs/currency futures tend to have less gaps between bars; bars close and open at roughly the same price.
Most stocks have gaps between the candlesticks/bars, due to the opening and closing of the market every day.
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.
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.
https://synapsetrading.com/wp-content/uploads/2017/02/Dangerous-Myths-About-Trading-that-Could-be-Affecting-Your-Profitability.png7201280Spencer Lihttps://synapsetrading.com/wp-content/uploads/2019/10/logo.jpgSpencer Li2017-02-22 16:34:232021-10-04 18:22:21Dangerous Myths About Trading that Could be Affecting Your Profitability
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.
In this post, I’m going to talk about the trading rules which professional traders use, and how you can apply them to your own trading.
1. Always be disciplined
Follow your plan and rules
Do not be swayed by your emotions 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 let 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 will lose money on some trades
Take your losses easily when they come
Do not be stubborn and bend your rules
4. Manage your emotions
When in 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 trade 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
Summary
The difference between a newbie trading and a successful trader is how good their trading rules are, and how well they can follow their rules.
If you trade without any rules, you will be always be second-guessing your decisions, and then regretting your decisions when they turn out to be wrong. This creates a lot of unnecessary mental anguish.
With trading rules, it reduces the stress of decision-making, because you can separate the planning phase (where you create the rules) from the execution phase (when you are actually trading).
Lastly, having rules makes it easier to systematically replicate your success over and over again, because once you know the rules which work, you can just keep applying them over and over to get the same results, whereas if you don’t have rules, you won’t know what actually works.
Now that I have shared all my best trading rules, which rule do you think will make the biggest difference in your trading results?
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.
Another big danger to new traders is the idea of the holy grail of trading.
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 holy grail can appear in many forms – a “sure-win” indicators, a “100% win rate” trading system, a “legendary” guru, or a “unique proprietary” software guaranteed to make you rich overnight.
They all hold the same promise – to make you rich quickly with little effort.
Unfortunately, there is no shortcut to success, no magic bullet that will make you a super trader overnight.
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 many years to realise it, and I have been through at least 200 books and tried almost every method or tool available, before 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.
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, nut make sure you are not practising the wrong thing.”
“It’s not the method or system, it’s the trader.”
So, my advice to new traders is to stop jumping from system to system, hoping to find the holy grail (which does not exist).
Instead, start learning as much as you can, then find a good system and work with it until you find success.
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.
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.
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.
Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.
