Forex Market Myths and Realities
Take classic quotes from Alexander Elder, ” How to Play and Win on the Market ” (How to Play and Win in the Market):
“If a friend of yours doesn’t have much experience in farming, suddenly comes to you and says that he is planning to support himself from farming in a quarter of the land, and you know that he will suffer from hunger. We all can imagine how there are many sources to be obtained from such a large land. However, in the world of trading , human growth from children to becoming adults will develop their imagination. “
When a beginner receives a few blows and his capital falls below the requested margin, he will immediately begin to lose his determination, feel scared and begin to conclude various negative thoughts about the financial market. He is like a child who feels frightened if he walks through a cemetery or when he wants to peek at something under his bed, he is afraid that a ghost will appear or look at him. The unstructured nature of financial markets has become a fertile land for growing wishful thinking.
And our fantasies can influence our behavior, even when we are not even aware of their existence. A successful trader must first be able to recognize his fantasy before releasing it.
Dealers Cheat and Other Myths about How Broker Works
There are three ways of working a dealing center .
1. None of the client’s positions are hedged with an outside counter agent . In this case, the interest of the dealer is the loss of the client, otherwise the client’s profit will drain the dealer bag. And this is true, many dealing companies operate with this method in their first years because they do not have enough trading volume to protect the value of clients’ positions on the interbank Forex market (the standard lot is 0.5 million). For dealers who are still “young” will bear the heavy risk if one client wins a large amount of trading , while the company is unable to fulfill its obligations. In order to reduce this kind of risk, dealers like this actually take steps by “helping” the clients so that they lose the transaction, a practice that damages the industrial image in general.
At the beginning of the development of the Forex market, dealing centers were actually fewer and fewer, the majority of them did not have enough clients to protect client positions in the larger market. As a result, to minimize the client’s profit on the company’s bottom line , many dealers do an unfair job of trading clients. ” Slippage “, which is the fulfillment of orders at prices that are less profitable for clients, this is one of the ways that dealers do to smoothly disrupt their clients’ efforts. Dealers born in the early days of Forex and who can last a long time will get a large client base. And because larger companies generally don’t want to sacrifice their reputation by making rapid leaps (in this case the quoting process) to their clients’ costs, dishonest dealing practices are transferred to a low budget shift, a fraudulent dealing center ( fly-by-night ).
When the dealer managed to get a large number of clients and learned a lot from his experience, some things became easy to understand, including the following:
- In the long run, the advantage of ” fly-by-night ” operations (which work against clients) turns out to be the same as when they profit from spreads (the fact that the company’s profits and losses on clients will drag them for a long time). And in the end, a larger client base is the only way to advance the company, and of course it cannot be separated from the reputation of the company itself.
- A good reputation and the long-term existence of clients will be more profitable than the short-term benefits obtained through client failure in trading. Therefore, although dealers are still processing everything internally, in the end they still practice unethical practices (bad execution, pulling stop losses etc.), which are the characteristics of the fly-by-night class .
- The company becomes more valuable and management does not want to lose it just because of the benefits that some clients get.
- The number of client accounts is increasing (a positive sign to build a good reputation) and even some large deposit clients are starting to emerge, most of which have been successful and have more professional experience and better training.
As a growing dealing center , company management begins to think about client hedging positions, and as a result, they move to the second business model.
2. Hedging on the client’s position as a whole. This means that all client positions (amounts agreed upon before) are subject to hedging in the main market. This certainly can erase the company’s bad image regarding the motive of “resistance” to clients. From now on, successful clients no longer deliver the company to the brink of collapse.
3. Hedge for each client’s position on the interbank market. From the client’s point of view, this model has no advantage when compared to the second model above. Some of the drawbacks include:
- Initial balance requirements on very large accounts and minimum transaction amounts;
- Slower execution.
The Myth That It’s Impossible to Make Money on Forex
Many say that 90% of those who trade using loans from brokers ( leverage ) in the financial markets ultimately suffer losses. Unfortunately, that is true. Let’s learn what things cause these traders to lose their capital. If we analyze how the “90%” traders are trading , we can listen to some conclusions about common mistakes made by traders who fail, including the following:
- Do not have an understanding of the basics of analysis. Traders who fail to understand the basics of analysis, both fundamentally and technically.
- Don’t understand the philosophy behind trading. I will explain it through an example that I will take from my own experience. When I was a young technical analyst, and at that time I analyzed a currency, namely Yen. I look at the weekly chart, all indicators point down, the daily chart shows the same thing, the graph for 4 hours – also the same, 5 minutes – is still the same. I think that’s good, all pointing in one direction. I open a position. The result?Misery! My belief in analysis made me shock. I went to look for a beer and thought a lot about what had just happened. I realized that it was not the wrong technical analysis, but me. Weekly and daily charts show that the overall market movement ( trend ) is down. The shortest timeframe shows that the direction of the trend has occurred and appears to have emerged. An ideal time to sell, if the weekly and daily charts go down, but the 4-hour chart turns up ( bullish ) and the hourly chart shows that the upward movement has stopped (for example, when the uptrend has split).
- Don’t understand the Money Management rules:
- Do not apply stop loss at all.
- Stop loss placement is too close to the entry price . Stop loss orders on the Forex market must not be less than 40-50 pips of the entry price. Stop losses that are placed too close often present “disaster”, because you are very unlikely to reach the top or bottom when you enter the market (even if you believe that your analysis is correct, there may be some initial price movements that are contrary to predictions You). This can happen around 10-15 pips. Plus 5 pips from the spread . And if you take into account market noise (10-15 pips), the stop loss order placed less than 40-50 pips from the entry price – will hardly have room to maintain position.
- Not paying attention to the ratio between Profit / Loss of 2/1.
- Trying to fix profit from 5 pips, but willing to lose up to 100 pips or even more. In this case, you need 20 transactions that produce profits, which are only intended to cover losses suffered for a losing transaction. This means that the percentage of success exceeds 95% – something even George Soros is unable to do. Professional analysts predict the level of accuracy with a percentage of 75-80%.
- Basing trading with very small fluctuations. I think that the market reflects noise about 10 pips (a large order is placed on the bank that bumps prices up or down by 5 pips after the price returns to the previous level. Plus, some market makers show slightly different prices). Let’s take this as axiom (truth without proof). That means that:
- Analysis with a minute timeframe allows you to capture movements on 15 pips. With 66% is market noise (10 pips).
- Analysis with timeframes per 5 minutes allows you to capture movements at 30 pips. With 33% is market noise.
- Analysis with hourly timeframes allows you to capture movements at 100 pips. With 10% is market noise .
- Analysis with timeframes per day allows you to capture movements at 500 pips. With 2% is market noise .
- These numbers are hypothetical. The most important thing here is the concept. Thus, we will have plenty of time to predict market noise when we want to analyze short periods of time. Market noise is difficult to predict – even though the market is predictable – that is why we have to analyze longer periods of time.
- If you have not yet succeeded in trading on Forex, then pay close attention and reflect on what I have written above and draw your own conclusions wisely. In order to successfully trade on the Forex market, you must have certain knowledge. In addition, you also need to understand certain guidelines or rules, especially those related to financial management ( money management ).
Myths about the Lack of Number of Brokers in Brokerage Companies, or Why Does It Take Long Time to Execute Transactions in a Great Price Fluctuation Period?
Delays can be caused by the following:
- Software or network cannot handle the rate of trade traffic during periods of large price movements.
- The number of broker employees is small.
Another question, why brokers who do not have problems or shortcomings as mentioned above sometimes still experience delays when they want to process orders?
The most common business model applied by large companies is the model as in way of work No.2 (see above), that is, the company protects the value of the client’s position with a counteragent from outside. When market conditions are calm, brokers are able to process client transactions directly and then pay attention to hedges in a larger market (if needed). There is no reason to rush, even brokers might be able to jump for a few pips, better than those of their clients.
But everything is different when the market is volatile. The client’s position may soon need to be subject to hedging, otherwise the price will disappear and the broker may suffer a loss. Therefore, client orders are processed at the same time as the company’s hedging on the client’s position in a larger market. Of course, processing client orders will take longer. However, here we must consider it a “payment that must be fulfilled” when working with a reputable company and who does not work against clients.
Myths about the lack of capital
I will quote the sentence Elder again:
“Many traders fail to think that they will succeed if they have more capital. Most such traders will be thrown out of the game for a series of failures or even for a failed transaction. Another thing that often happens is that this amateur trader closes all his positions. the market actually moves in the direction he has anticipated, and this poor trader is disappointed with himself or the broker, “If only I could last another week, my fate would be better”.
Traders who fail to interpret this as a justification of their method. So they look for capital (or borrow) to open another account. But the same story is repeated. The trader is thrown from the arena, and watching from outside the arena a market that moves away with his direction, then believes the analysis is correct, just a little late. At this moment, he returned to dreaming, “If only I had a larger amount of account capital, surely I would be able to last longer and make profit”.
Some traders collect their capital from relatives by showing their chart record as proof that they know what they should do next. However, even though these poor traders get more capital, they will still potentially lose the capital.
The biggest problem for traders who fail is not in lack of capital, but in the lack of understanding of how to trade . A fragile trader can do it through a large capital account as fast as a small one. He played it too much and neglected the rules of financial management. These poor traders often place positions that are too risky in the market, even with accounts that have more capital. Regardless of how great the strategies owned by traders , making transactions with a high level of risk on account capital, of course, will be very potentially catastrophic, especially if the transaction does not side with you, then you will be sadly thrown from the game arena.
I often receive questions about how much money must be owned in order to start trading . They want to have enough capital to survive until entering a period of decline. They worry that they will lose a lot of money before starting anything. This dream is like an engineer who plans to build a bridge but it has collapsed before it finishes making it.Can a surgeon kill some of his patients before he becomes an appendicitis expert?
An amateur may not be able to imagine that he will suffer losses and is not ready to handle such situations. An opinion that believes that failure caused by a minimal amount of capital is a wrong overview, because this can actually be a trap that will distance yourself from two very important things, namely discipline and realistic plans for managing funds.
One of the advantages of an account that has a large capital is the relatively smaller start-up cost for your account. If you manage funds in the amount of one million dollars and spend $ 10,000 on several computers and various seminars, you only need 1% to cover these costs. However, if you only have $ 20,000 in capital, then for the same expenses, you will need 50% of your capital.
Myth about Autopilot
We take an example, an unknown person comes to you when you are in a private garage and the person wants to offer you an automatic steering system. “With just a few hundred dollars, you can get this computer chip that will take control of your car’s steering wheel.” You just sit and sleep when you travel with the car. You might laugh at an offer like that. But, will you laugh if someone offers you an automated system to invest in financial markets?
Traders who believe in the “autopilot” myth will think that making money can also be done automatically. Some of them try to make their own automated systems, while others buy those that are ready to use. People who have honed their trading skills for years, ranging from a lawyer, a doctor to an entrepreneur trying to buy them with value that is equivalent to their experience, namely just for an automated trading system. This group is generally shrouded in greed, laziness and big mistakes in understanding a mathematical thing.
A long time ago, a system like this was written on a piece of paper, and now the system has been stored on a protected disk. Some of them are implemented in very simple ways, while others are quite complex, with built-in optimizations and financial management rules. Many traders seek fortune – an attempt to change the lines of code into a source of money that will never stop flowing. Those who pay for the sake of an automated trading system are reminiscent of a medieval knight who is willing to pay an alchemist for a secret about how to turn ordinary metal into gold.
Human behavior, with all its complexity, does not want itself to be replaced or controlled by an automated system.Computer programs will never be able to shift the position of a teacher, or a computer-based accounting system will not cause mass unemployment among accountants. Most human activities require the ability to make decisions – where computers are partially needed, but never can fully replace human positions.
If you manage to control an automated system, you may have filed your retirement earlier and then go to Tahiti and live the rest of your life with a luxury, using your broker’s check without limits. However, so far the only people who have succeeded in making money through automated trading systems are the people who managed to sell the system. They have created a small space that is very attractive. Then, why are they even busy selling the system?Wouldn’t it be better for them to take a vacation to Tahiti and collect checks from their brokers? Of course these sellers have their own answers. Some of them prefer programming rather than spending time trading on financial markets.While others sell their systems only for money as their investment capital in the future.
However, market conditions are always changing and what happened yesterday may be different from today. A skilled trader always checks his methods when he sees changes in the market. Automatic systems will not be able to make the necessary adjustments and are likely to fail.
The use of an autopilot system will certainly be subject to a large payment rate. This is because pilots – unlike computers – can handle unexpected situations. For example, when an airplane flying over the Pacific ocean is damaged and requires an emergency landing, or when an airplane flying over Canada suddenly runs out of fuel, only humans can handle situations like this. Give up money for an automated system just as you believe in a life with an autopilot system. This method is a good solution, if you consider events that unexpectedly hit your account.
There are various kinds of good systems that have been circulating at the moment, but they must be seriously controlled and their trading must be watched. You don’t just have to activate it, but you must follow the entire process.