Trading Myths and Facts – Part 1

Trading is a fantastic way of life. It can ultimately give you the financial freedom you dream of; and on the other hand, it can easily lead to financial catastrophe. The major difference between the attainment of bankruptcy and solvency in trading is that the mindset of novice traders is shaped by trading myths, whereas the mindset of successful traders is shaped by established trading facts. No matter what or who you are, no matter the type of financial instrument and trading systems you use, you need to accept time-tested trading facts discussed here.

More than anything, having the proper trading mindset is the only thing that can set you free from the confinement of failure on the markets. Some trading myths and facts will be systematically and gradually discussed in the series of articles that bear the topic above.

The Majority Is Not Always Right

Whether you are new to trading or have been trading for years with little or no success, then this topic is for you. You should not allow yourself to be discouraged from trading. This series of articles should save you from some of the most common trading pitfalls and transform your trading life. Bringing yourself into harmony with effective trading principles will help prevent you from becoming overconfident in good times, as well as helping you to cope when the going gets tough.

Before you can be a consistently successful trader, you need to know that you should not be afraid to be different because the majority is not always right. Why? The majority are losers on the markets, and for you to belong to the minority who are winners on the market, you need to develop the courage to walk against the crowd. If you do what most others do, you will get the results most others get. You cannot approach the markets with the wrong mindset and ineffectual trading ideas and expect to survive for the long-term.

It is not uncommon for most beginner traders to have fallacious ideas and unrealistic expectations at the beginning of their trading careers (I was dwelling in a fool’s paradise many years ago). An innocent beginner has many enemies; enemies that appear like wolves in sheep’s clothing. These enemies may appear as your friends: some may even appear as your mentors. They come in many forms.

Some of them are deliberately out to scam you. Some of them are out to sell you what they think can help you in trading (and of course they have a profit interest in this), plus it might even be a product they themselves do not use! Some of them have good intentions but bad ideas. There are also innocuous myths that need to be busted.

Many people can talk the talk but cannot walk the walk. Those people who do what they say they do, I really respect. Sugarcoated words from deceptive marketeers come and go; established trading facts remain. If you find it difficult to accept the facts (in contrast to myths) discussed here, I am afraid you might be forced to accept them through personal experience.

My Novice Years

If I had had the correct mindset when I was getting my feet wet as a beginning trader, I would have been spared many of the harsh experiences I later went through. However, I am thankful that I later discovered the facts even if I had to learn them the hard way. My trading experience really improved a lot after going through this. I spent a fortune buying trading system after trading system thinking I could gain hundreds of percentage point returns per year. Yet, I was not making money in the long run.

What Was I Thinking Those Days?

1. I thought markets were easily predictable.

2. I thought the secret of my success was in a great trading system.

3. I thought I could always make 100 per cent per month, and if I could not do that, I got frustrated.

4. I did not care about risk management. My major care was profit-making.

5. I was not disciplined.

6. I thought trading required only brief training and I could then go smiling to my bank even though I did not have any experience at all.

All these beliefs were inculcated in the words I heard and read from deceptive marketeers (most of whom were posing as professional market players). But now I believe that:

1. You can be an effective trader, though the markets are unpredictable.

2. You need a system to play the markets, but the key ingredients to your success are: cut your losses short and let your profits run, position sizing (with risk management) and discipline to follow the previous two principles. Your trading system is not the ultimate secret.

3. Making hundreds of percentage points per year is always an illusion. You might get lucky by risking too much and doubling your accounts, but markets take them back soon enough. Good traders can survive bad markets without losing their entire capital.

4. Unless you have rock-solid discipline to follow signals from really successful traders or can get coached by them or duplicate their trading styles, it will take you years to become a successful trader on your own.

Now let us discuss the myths.

Myth #1

You do not need any previous experience to use a particular trading product to make money on the market.

Another similar myth: We shall train you for a few hours (or a few days). Then you can start enjoying consistent success on the market.

Fact: A marketer once told me that if potential customers were not lied to, they would not buy their products. He noted that people are easily attracted to fantasies instead of realities. But no evil would be justified on the ground of expediency.

The sad fact is that most who call themselves trading coaches offer to train beginners for one day or two days or a few days or a few weeks, whereas it takes years to become a successful trader. The market is a very complex thing – more complex than you can imagine. Just ask yourself these questions: if you entered a university as an undergraduate studying law or medicine, how long would it take you to become a qualified lawyer or doctor?

The trading world is replete with some people who would use unbearably exaggerated words to attract unwary customers. Telling people with sincerity that they need no previous experience in order to use a trading product successfully is tantamount to telling them that they do not need any experience to become a qualified doctor. How long does it take to master a profession that entails world class competition? Did you know that trading is one of the toughest business activities in the world? Why do people tend to be childishly irrational when it comes to training for trading? No wonder many people fail in trading; they went through ridiculously short training.

Many people attend ‘how-to’ and ‘get-rich-quick’ seminars – how to make money doing this, how to make money doing that (telling people that trading is easy is a blatant lie and an abject form of criminality). Yet reality-based statistics shows that over 90 per cent of seminar attendees do not succeed after all. The easiest way to become poorer is to try to get rich quickly. Common sense should tell us that seminars are good only for creation of awareness and information dissemination, they do not make anyone a skilled professional in anything. Rigorously practical activities with trainer/trainers are needed to develop necessary skills in any area of human endeavor.

You can develop your trading skills over the years. Yes there are pitfalls in trading, but you can get over them too. The best traders in the world have spent years polishing their trading skills.

Making Progress through Trading Mistakes

“Most of us grow up in an educational system that brainwashes us to think we have to get 94-100 per cent correct to be excellent. And, if you cannot get at least 70% correct, you are a failure. Mistakes are punished in the school system by ridicule and poor grades. Yet, it is only through mistakes that we learn,” writes Dr. Van Tharp. Contrast that with a .300 hitter in baseball who gets paid millions.

In fact, in the everyday world few people are close to perfect and most of us who do well are probably right less than half the time. Indeed, people have made millions on trading systems each with a reliability of around 30-40 per cent.

Inventor Charles Kettering gave some concise but effective advice on how to handle failure. It is noted that one must learn to fail intelligently. Once you experience a failure, you have got to analyse the flop and find out why, because each failure is one more step leading up to the ladder of success. The only time you do not want to fail is the last time you try. The following are the suggested ways of turning failure to success: (1) Honestly face defeat, never fake success. (2) Explore the failure; do not waste it. (3) Never use failure as an excuse for inability to try again.

Similarly, the fact that the majority of traders fail does not mean that trading is a dead-end activity. Traders who are successful prove otherwise. Occasional losses leading to transient drawdowns are inevitable but not insurmountable challenges in trading.

The “graduation rate” from novice to experienced trader is low, and if you want to be one of the rare few who make it, then you must gain as much experience as possible, and make any necessary sacrifices. So do not hinder yourself from reaching the status of a master trader. Put in the necessary time and effort. You will be rewarded in the end with lasting trading success.

Conclusion

The trading world would be much easier if beginning traders were told the truth about trading, as well as the way ahead. It is essential that traders have an unbiased view of trading as a way of life. Proper knowledge about trading facts will help you remain resilient throughout all the vicissitudes the markets will throw at you. While it is not useful to be a pessimist (holding negative views about trading), being a realist with moderation will improve your trading life by leaps and bounds. Next month we will cover more trading myths and facts – in particular trading strategies and results.

Author: Mustapha Azeez
Originally published: June, 2011.

Reproduced with kind permission of: TRADERS’ media GmbH