Top 10 myths about trading

Top 10 Myths about Trading:

There are misconceptions about trading. Before you invest your time learning about trading it is important to first understand what trading has to offer. Trading is definitely very promising but not everyone is prepared for it. I am not saying that you cannot develop the traits required for trading because I am a firm believer that “if you really want something and work hard to achieve it, you will eventually get it.” But bear in mind that you only have limited time and energy. So be wise and invest your time and energy in your strengths.

Before I explain and introduce you to trading terminology, I suggest you understand what you are getting into. Let’s clear some misconceptions (Myths) that most people have about trading. Below are some of the most common myths about trading:

Trading is easy:

No, it is not! It is easy to start trading and it is easy to buy and sell stocks online.  But succeeding and making money is anything but easy.  It takes education, time and practice. Of course, there are talented traders that learn very fast, but generally speaking, starting traders should dedicate part of their time to educating themselves, practicing and developing strategies.

Trading requires no special skills:

Some people have the skill and knack for it. These people are disciplined and can control their emotions. Additionally, Mathematics, analytical skills and risk management skill definitely help a lot. Obviously, you can develop those traits if you are determined! What really counts is that individual’s discipline and determination. Show me a determined and disciplined trader, and I will show you someone who will be able to outperform the markets. To be successful in trading you need these skills.

Good analysis is enough to make money:

Analysis is only one component to be successful in trading and it is definitely not the most important aspect in trading. Perhaps, this is the reason that traders make more money than research analysts. Most banks have separate people for trading and research. Good research doesn’t always lead to good trades.

You need small capital to make big money in trading:

You need a decent capital to make money in trading. People are lured into trading because they think they can make big money by risking small amount of capital. But the truth is you need decent capital to make decent return. Don’t expect to be rich overnight. Only discipline and hard-work can make you rich over a long period of time.

Trading is gambling:

This is the first thing you will hear from family and friends if you ask them about trading. A trader looks for odds in his favor and keeps risk under control. Anyone who is trading without proper money-management, risk management and risk-reward calculation, is gambling. To be a good trader you need to manage your risk and capital. Not all trades are equal. Look for better risk-reward proposition before you initiate a trade.

Markets that go up must come down:

Just because a stock has moved up very sharply (or very significantly) doesn’t mean it can be shorted now. Similarly, just because a stock RSI is in overbought region you shouldn’t short it. A stock can remain in overbought territory for very long period of time. Stock prices are determined by demand and supply mechanism. AS long as there are more buyers than sellers, the prices can rise higher.

Markets that have crashed will go back up, eventually:

Just because the Japanese Nikkei index was at 40,000 does not mean it was a great value as it fell to 30,000, 20,000 and 10,000.

Trading is fun:

If you are looking for adrenaline rush or kick then trading is not for you. To make money in trading you got to be disciplined. Discipline is tough and boring but it rewards in trading. A disciplined trader should have a entry and exit plan for all possible scenarios before initiating a trade. Yes, you can be opportunistic in trading as long as you control your risk with strict stops.

I just need to find the right indicator to be successful:

Don’t look for “Holy Grail” because it doesn’t exist. There is no single formula that will bring you success all the time. Even the most probable trading patterns fail to materialize many a times. There is no single indicator that will work all the time. If there was a single formula to success, “automation trading software developers” would be the richest people on earth.

Traders need to stare at charts all day long:

While there are plenty of traders who do stare at the screens for hours, this minority of traders is putting in too much effort! (In my humble opinion.) While taking trades every few minutes may seem like a great idea, truth is the majority of time the charts are NOT in areas we should be trading.

Trading is 9 to 3 job:

The most important work traders do is when the markets are closed. They have to prepare their plan and strategy for next trading day. Successful trading demands proper planning and during the market hours it is very difficult to concentrate.