If you are just starting out as a Forex trader, then there
is a high probability that you have heard a lot
of myths about trading currencies circulating
in various blogs and trading forums across the Internet. Like the myths
about dragons, more often than not, these myths may
not be relevant to your unique situation.
Let’s take a look at four of the most common and inaccurate Forex myths and see how
you can pretty much ignore them and still trade your way to become a successful
investor.
Forex Myth # 1: You Need a Lot of Capital to Become a Successful Forex Trader
This myth is rooted in the assumption that you need a significant annual return from your Forex
account. Sure, if you require to make
$40,000 per year to cover your cost of living, and your trading system can only
generate 40% per year return, then you must start trading Forex with an
investment north of a $100,000.
However, if you live in a country where the cost of living is much lower compared to a developed western
country, you can start trading with a much smaller amount of capital. For example, if you are looking to startForex trading in Nigeria,
you can probably get away with earning 40% return on an only $30,000
investment.
Forex Myth # 2: You Should Only Take Trades with 3:1 Reward to Risk Ratio
Sure, winning a trade
with 3:1 reward to risk ratio is a good way to earn consistent profits. But, you need to remember that your system’s
average win rate and other money management parameters will still play a pretty
important role in your success.
Let’s say you have a trading system that wins almost 80% of
the time, which means you can take trades with only 1:1 reward to risk ratio,
and still come out profitable after a series of 100 trades. On the other hand, if your system’s average win rate is
only 10%, by taking only 3:1 reward to risk ratio trades, you would still lose
you money.
Forex Myth #3: Trend is Your Best Friend
When you trade with the trend, your chances of winning
becomes higher. However, if you have mastered the art of counter trend trading,
you can take much higher reward to risk ratio trades in the process.
For example, when trade
with Candlestick reversal patterns, you can get away with a tight stop-loss.
However, when you are using a trend following asystem
like the Chaos method, you need to set a stop-loss that is hundreds of pips
away from your entry, which will decrease your reward to risk ratio.
Forex Myth #4: You Need to Trade During Active Market Hours
Trading during London and New York market hours mean lots of volatility and lots of opportunities to trade. However, what if your trading system relies on low market volatility to churn out profitable
trades? In that case, trading during most active market hours might turn out to
be counterproductive for you!
If you are trading Forex in
Nigeria, and cannot stay active during
American or European market hours due to having a day job or other obligations,
you can still become a successful Forex trader by using a system that requires
low market volatility.
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