Want to validate some trading facts? Unfortunately, the world of trading is one of those areas where there is a lot of myths – things that sound like facts but are not. Whether you are a newbie or an experienced investor, it takes time to distinguish between factual information and misinformation. It can take days, months, or even years to remove fact from fiction.
Many traders have spent hours trying to test the reliability of some trading tips obtained on the internet.
Because our time is precious. I’m going to tell you about five common myths that you may hear often. From there you can avoid the same frustration that many investors experience.
First rumor: Trading Without Emotion
Emotions are detrimental to trading, which is what many trading facilitators assert. Is it possible to enter day trading without emotion? This trading myth can make you seek to kill your emotions and I can assure you that doing this is a bad idea.
Don’t change yourself into a robot! Anger, sadness, and excitement will always be with us, and a disproportionate proportion of any of these emotions can push you to the depths of loss. It’s okay to feel upset once in a while after a losing trade. Just don’t let yourself get caught up in it.
Anger is only temporary, you need a few seconds or minutes to cool down before we start again. To control your emotions during trading, you need a little practice first and exercise is the best way to do that. Jog, walk, swim, or do push-ups to release anger.
1:1 for the risk-reward is gambling
This is the basic mistake, a 1:1 risk-reward ratio means a trader is willing to risk the money they invest in a position.
For example, you opened a long position for $100 Ethereum because you believed its price would go up, but that didn’t happen. Instead, the price dropped – $100 was gone. “Oh my, that’s gambling!” Some traders may think so. However, some traders believe this is not gambling because they are confident in their awareness of their risks.
Not every trader is willing to risk $100 with a profit margin of up to 92%, as it can also seem intimidating to a beginner. If you are not ready to lose that much and prefer to be safe, you can try a 3:1 or even 2:0 risk-reward ratio to get started.
Here’s what you need to know about calculating the risk-reward ratio. The formula commonly used to determine the ratio is:
Risk-reward Ratio = (Entry Point – Stop Loss Point)/(Profit Target – Entry Point)
For example, during Earnings Season, you open a long position on Ethereum for $100 at 257.82 because you believe its price will increase upon the release of the report.
You set your stop loss at 257.72, with a profit target of 258.07, so (257.82 – 258.72) / (258.07 – 257.82) = 0.10/0.25 = 0.4.
0.4 is risk-reward ratio, safe enough to start with without too much risk.
Over time, you will gain the knowledge and confidence to see for yourself that the 1:1 risk-reward ratio is not a trading myth. Rather, it is a bold method to bring you higher profits.
Leverage Waste Your Money
Leverage is a trading mechanism that allows a trader to increase his or her trade size with some funds lent by the broker. Some traders believe that leverage (also known as multiplier) is bad as all our deposits disappear instantly as soon as the market goes against our trades I. The fear of losing money has made this idea a popular myth among traders, but that is not always the case.
Leverage is beneficial because traders with less cash can increase their trading power. However, money and correct risk management are required to prevent the trader from making dangerous decisions. For example, taking advantage of all their funds in a single transaction is a dangerous move.
The good news is that Olymp Trade has a multiplier unlike any other. It is available in forex trading mode and different assets can have multiple restrictions on the multiplier. Beginners should not use a higher multiplier when trading with leverage for the first time. It is better to choose the lowest level.
Furthermore, the Olymp Trade platform does not allow your losses to exceed the trade size. So don’t let this trading myth stop you from making the most of Olymp Trade’s multiplier. Read more about multipliers like leverage in Forex here.
Shorter Time Frames Are Low Accuracy
A young trader once said: “The lower the timeframe, the less accurate the trade setup becomes.”
Here is another day trading myth that you may be familiar with. Some traders find it difficult to achieve satisfactory results with shorter timeframes, while some other experienced traders say that higher timeframes are better as they filter out market noise.
This opinion can be shaped by the nature of the trading chart itself. Since the price seems more unpredictable on shorter time frames, you will need to think more in order to forecast.
The truth is that trading can’t make you rich if you don’t set your trading goals, daily goals, and strategies to get there. A higher time frame does nothing, except that you have more time to analyze the factors that play a role – fundamental and technical analysis. The shorter time frame is not too difficult for those who like to invest but don’t want to wait too long to see results. Practicing control and analysis in a short time can completely help you predict with high accuracy.
Comes Down then Go Up
We have seen these ups and downs on a daily basis on trading charts. The steep fall in commodity prices, especially oil, during the COVID-19 pandemic has led to outstanding growth. For indices, the opposite has been true since the Fed raised key interest rates not too long ago. Any price drop will eventually rise and vice versa. So how can it be a trading myth when it’s real? See chart below.
While the ups and downs repeat themselves in trading, we will never know exactly when the tide will change its course. If you enter a bullish trade and the price drops suddenly, don’t pretend that it’s normal, “yes it will go up, don’t worry” and you don’t feel the need to place a stop loss. You have put your faith in a trading myth, which is risky behavior.
Instead, always set a stop loss, regardless of your trade size. In the Olymp Trade platform, you can also set a trailing stop loss to protect your balance – a stop loss that follows asset price movements.
Trading is an open opportunity for everyone to make a good income and a better life. Just like any other business, it takes hours of study and practice to get the best results. We look for helpful advice everywhere that provides clear instructions to help you get better at trading, but we have to be careful not to get caught up in some old trading myths that can make us away from profit.
Remember, there is no such thing as a one-size-fits-all formula in trading. You may have met someone who shares their trading experiences with you and is starting to question your own approach.
If the things we’ve talked about above seem similar to what you’ve been through right now, it’s time to take a break, recharge, and get back to learning in the first place.
Just follow trusted sources like Traderrr.com Blog to find answers to all your questions and of course, practice! It is the best way to change all the myths in trading.