Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Do you know the truths about forex trading?

Traders face a barrage of information when they start out in the markets – and being able to sort the wisdom from the folly could be the difference between success and failure. Should you risk 1% of your account per trade, or 5%? Does RSI work better than stochastics ? And is Bitcoin really a reliable store of value? Granted, some topics will always be debatable, but with the help of our DailyFX expert analysts, we uncover the truth about forex trading, the lies, and the murky bits in between.

First, learn the truth about your own forex journey with our DNA FX Quiz , helping you discover the kind of forex trader you are.

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Truth or Lie: Traders Need a Financial Background

Paul Robinson

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

A financial background can be useful for understanding how forex and other markets work. However, more beneficial are skills in math, engineering and hard sciences, which better prepare traders for analyzing and acting on economic factors and chart patterns. It doesn’t matter how much awareness you have about financial markets – if you can’t process new data quickly, methodically and in a focused manner, those same markets you thought you knew so well can eat you alive.

Truth or Lie: Trading is Easy

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Trading is like running a business. In order to be successful, you need to learn from mistakes and have rules in place to help protect your capital. Like a business, it’s crucial to have appropriate strategies on hand for varying market conditions. Setting up a business is easy, and similarly, trading is easy too. Developing successful strategies and making money? That’s the hard part.

Truth or Lie: You can’t be successful with a small trading account

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Can you be successful with a small trading account ? It depends on your definition of successful. An account needs to be large enough to accommodate proper risk parameters. But success is relative; a high rate of return is based on percentages and not on monetary amounts.

For example, a 20% return is a 20% return regardless of the account size. However, if your 20% return isn’t worth enough in hard cash, it might be hard to incentivize yourself to improve as a trader.

Truth or Lie: A profitable trader wins most trades

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Bragging rights be damned: the number of trades you win is irrelevant. Profitable traders simply make more money than they lose.

Say you win five trades and make $5,000, but lose one trade and lose $6,000 – you have won more trades than you have lost but are still down overall. Profitable traders will set rigid risk-reward parameters for a trade – for example they might risk $500 to make $1,000, a risk-reward ratio of 1:2.

If a trader makes five trades using this method, loses three of them and wins two of them, the trader is still $500 in profit ($2,000 profit-$1,500 loss). Don’t be afraid of taking a few hits: if your process is sound, one big winning trade can reverse your fortunes.

Truth or Lie: You need to spend a lot of time monitoring trades

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

How much time you spend trading, and monitoring trades, will depend on your trading style . Those employing a scalping strategy , for instance, will make a large number of transactions per day, entering and exiting many positions, and will need to pay close attention to their trades on the shortest timeframes.

However, position traders won’t need to spend as much time monitoring, as their transactions may last weeks, months or even longer – meaning long-term analysis will account for short-term fluctuations.

type of trader

Truth or Lie: A solid stop loss trumps a ‘mental stop loss’

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Some traders advocate a ‘mental stop loss’ when the market gets tough – that is, relying on oneself rather than a computer to set a level at which to exit a losing position. The problem is, a ‘mental stop loss’ is just a number that makes you worried about the money you’re losing. You may fret about the direction of the market - but you won’t necessarily be compelled to exit your trade.

A fixed forex stop loss is completely different – if your stop loss price trades you are out of the position, no ifs or buts. Exercising proper money and risk management means setting solid stops. Period.

Truth or Lie: Success comes from trading markets with the tightest spreads

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Spreads may represent the primary cost of trading, but they aren’t the be-all-end-all when it comes to choosing your market. You may find an asset that has a wide spread but represents a strong opportunity due to its volatility . Similarly, you may find an asset with high liquidity and a tight spread, but that isn’t showing much trading potential. Above all, you should let your trading decisions be governed by setups presented by the market, not the size of the spread.

Truth or Lie: Expertise in economic analysis is important

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

The economic analysis key to a fundamental approach helps give traders a broader view of the market. Sound knowledge of the underlying forces of the economy, industries and even individual companies can enable a trader to forecast future prices and developments. This is different to technical analysis , which helps to identify key price levels and historical patterns, and provides conviction for entering/exiting a trade.

It’s true to say that expertise in economic analysis is important. However, so too is expertise in the technicals. Many successful traders will look to combine fundamental and technical analysis so as to be in a position to draw on as wide a range of data as possible.

Truth or Lie: Trading the news provides the biggest opportunities

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

News can create big moves in the market, but that doesn’t mean trading the news leads to the biggest opportunities. For a start, the volatility of important news events often makes spreads wider, in turn increasing trading costs and hitting your bottom line. Slippage, or when you get filled at a different price than you intended, can also hit your profitability in volatile markets. On top of these drawbacks, traders could get locked out, making them helpless to correct a trade that moves against them.

Truth or Lie: Managing your emotions when trading is vital

Forex Trading Truth or Lie? Uncovering the Truths of FX Trading

Excluding emotions from trading is an impossible endeavor. It can lead to more internal conflict than benefits, which is why managing emotions is a better way of looking at it. You have negative emotions like fear and greed that need to be managed without suppressing positive ones like conviction that help drive you towards the best opportunities.

Anything we didn’t mention? Leave a comment to give us your own truth about trading, and make sure to share this article on social media.