Top 11 Forex Trading Myths & Misconceptions every forex retail trader should know about.

Overview

The internet is littered with fake news, myths and misconceptions and the forex trading sector is no exception. There are few, if any experienced professional bank forex traders sharing their knowledge. There is so much mixed and confusing online content about forex trading. It is hard to work out what is real and what is not. Most of the content has no knowledge or experience backing up the content at all. It’s just posted to pique your interest to get you to open a trading account or buy something.

In fact, I Googled ‘Forex Trading Myths’ and the top 10 pages were all the same. Go figure! So, my question is, who is copying who? In my 30 years trading experience I have found these to be the biggest myths and misconceptions out there.

- Bank traders are always trying to stop out retail traders
- Bank traders use loads of indicators
- Bank traders leave orders in the market for weeks and months
- Bank traders use automated trade robots
- Bank traders sit in front of the screens all day long 24/7
- You can trade successfully just using technical analysis
- You don’t need any extra resources to be a successful trader
- I can trade the stock market successfully so the forex market should be simple
- Trade plans, Loss Limits and Stop loss orders are only for traders with very little cash
- Using unconventional trading methods improves your chances of success
- The Brokers are always trying to stop you out and take your money

1. Bank traders are always trying to stop out retail traders

This is not only the biggest myth out there, but I also find it the funniest. Let me just explain the Forex turnover data collected by the Bank of International Settlements (BIS) to explain this better. Forex turnover data was last collected in 2016 (and is due to be updated in September 2019). It shows global turnover in the Forex market was around $5.1 Trillion dollars every day. Of which $382 Billion is attributed to non-financial customers (retail traders). So, retail trading equates to roughly 13% of all forex turnover. That’s a decent increase from 2010 when it was around 5% but still it’s a drop in the ocean compared to the massive volume (87%) going through the banks.

The Bankers DO NOT, and I repeat DO NOT care at all about what the retail trading market is doing. Sure, they have sections within the forex teams that manage the retail trading transactions but the big engine rooms, the main trading teams, do not even see any of it. They have their hands full trying to fight off the fund managers sniping them and the whipsaw price action from Trump without worrying about the small interest generated from the retail book.

I’ve heard things like ‘Know your Enemy’… what a complete load of 'fake information'. Anyone who is suggesting otherwise is a complete fraud and it shows me that they have never worked on a ‘real’ forex trading desk inside a big bank. They are not your enemy because they are simply not interested in the Retail Trader.

2. Bank traders use loads of Indicators

The traders at the banks are trained extensively to understand technical analysis, price action and the impact of the macro-economic fundamental data. These are the three core components they understand inside out. When you do know how they work, you don’t need any indicators to tell you what is happening or going to happen.

So, to think the bank traders sit around and watch indicators on their charts, you are sadly misinformed. Sure, we used to throw a few moving averages on our charts but that was more to add ‘fluff’ to a conversation with a salesperson than anything else. They were not used as a decision maker for a trade. If moving averages were so good, why would they refer to a different one every other day? The 7-day, 14-day, 21-day, 50-day, 100-day and 200-day moving averages are often mentioned.

They all get a blast on CNBC etc. but they are just ‘time fillers’ than serious trading opportunities. All the other indicators that retail traders use are designed to give them an answer about what to do because they don’t know what is going on nor what to do next. They may give you a random winner every now and again, as would just guessing, but in the long term they will drag you down.

3. Bank traders leave orders in the market for weeks and months

There is a myth generated by a number of trading educational company's, that there is a Supply and Demand level in the markets where the traders at the banks leave their orders in the market for weeks and even months. And when the market hits these levels it turns around very quickly and it’s the easiest way to make money. What a load of rubbish!

The traders at the banks are assessing the market daily and occasionally at a stretch you’ll have the odd trader, usually a long-term strategic guy, placing orders in the market for a week or two. But as soon as the macro-economic fundamentals shift so too do their orders. So, if you find yourself spending endless hours in front of the screens waiting for these ‘mysterious levels’ to hit, then stop what you’re doing and have a rethink of where this weird and wonderful strategy evolved from. If it existed, don’t you think all the bank traders would be talking about it?

To me this whole Supply & Demand approach is just a myth, and it’s an easy sell to a retiree with loads of savings with no trading experience looking for a quick sure-fire way to make money!

4. Bank traders use automated trade robots

If the banks used automated trade robots, then there would be no need for the human traders in the first place. You go back to the early 1990’s and there were a bunch of Fund Managers using so called ‘black boxes’ to tell them when to trade but still they didn’t execute the trades for them. They still had to call the banks and execute the orders.

The 'black boxes' themselves would basically include a bunch of different financial instruments and formulas that if all the ducks lined up, they’d go and execute a bunch of trades. Now this worked all fine and dandy pre-internet (1997) when the markets were generally trending, and we didn’t have so much instant information flow, but nowadays the market is so dynamic none of these systems can keep up with the now ever-changing market. Match that up with unprecedented global economic backdrop and you can clearly see why very few of these systems exist today.

The bankers themselves have intricate trading systems and use either EBS or Reuters to clear their trades and that’s all done manually. No automated trade robots unfortunately.

So, if the bankers don’t use them what chance do you truly give your retail automated trade robot? I know they’re back tested but usually to pre-historic conditions when the markets weren’t so volatile. So as soon as you turn them on you can watch your cash disappear!

5. Bank traders sit in front of the screens all day long 24/7

There’s nothing worse than sitting in front of the screens all day and the only traders who do it are the junior traders or trainees and of course a lot of retail traders. Me, I was walking around the trading floor all day catching up with other guys and trying to keep up with ‘trade floor’ gossip. If it wasn’t that it was organising the next big night out. You see the fact is the traders know when the markets are going to be busy and they prepare for those events well in advance. So, outside the major releases they take the time to have some down time which keeps them fresh for when the markets do kick off.

As a chief dealer in charge of a trading team I had no problems with this behaviour as long as someone was at the trade desk to cover any unexpected announcements and events. With the introduction of Trump, I’d say there may be less strolling around the bank these days as he drops a random bomb every other day.

One of the craziest things I’ve heard in the retail market is – “the more time you spend in front of the screens the better your performance”. I can honestly say not only is this false but in fact the opposite is correct. The longer you spend in front of the screens generally the worse your performance will be. It’s not unlike driving a car for 3-4 hours without a break. You get tied, you get weary and you start to doze off and you miss all the important things when it matters. Oh and you get tempted to place a 'bored' trade because nothing is happening. So, do yourself a favour an minimize your time in front of the screens and start analysing the markets. You’ll be fresh and ready to strike when you see the first signs of an opportunity!

6. You can trade successfully just using technical analysis

There may be some traders who could make a few bucks here and there but they’re probably using ‘very long term’ charts and just doing a few trades every few months. They wait for the trends and when they arrive, they place small trades with massive stop losses attached. So sure, they may get it right, but the trade size is so small, in my eyes it’s not even worth the effort.

You need to understand the markets are driven by the macro-economic fundamentals. The charts you look at each day are the result of the previous days, weeks, months, and years fundamental data. To me the number one thing is ‘direction’: Where is it coming from and which way is it going? If you have those two key ingredients, you’ll be a very successful trader without any technical analysis.

I’m not saying technical analysis isn’t important, far from it, but using it on its own you’re not going to be hugely successful because you’re missing the ‘direction’ ingredient which determines which trade to place. Especially in this day and age where for the past few years have been largely ‘trendless’ and direction has come from geopolitical issues. As one of my early mentors (Geoff Last) once said: Every sunken ship had a chartist!

Solely relying on your technical charts, without trending markets, is lambs to the slaughter!

7. You don’t need any extra resources to be a successful trader

Have you ever heard of the saying: “You pay peanuts, you get monkeys”? Well this is exactly what your results are going to be if you don’t have access to real time news and economic data. There are two main services available that the bankers use: Bloomberg or Metastock. If you don’t have either, then you are just guessing and you’re going to miss every move before it happens. Relying on Forex Factory or FXStreet or the like is not going to work. Now don’t get me wrong these sites are a great resource for what’s coming up but not for the ‘actual’ release which is the most important thing. Two minutes late is like two hours late. Spend a few bucks and get access to the services so you can trade with the market not against it!

Metastock Xenith is my platform of choice because it’s exactly what we used in the banks and it’s only $99/month.

Outside of the live news and economic data you don’t need much else. Of course your trade station set up is personal but I don’t think there’s any need for more than 3 screens. Although the more the merrier because you can have more live data in front of your eyes when you need it most instead of changing pages and taking your eyes off the market.

8. I can trade the stock market successfully so the forex market should be simple

All the financial markets trade differently and that’s why the banks have completely different teams trading them. The forex market reacts much differently to the economic data. It is a lot more volatile generally than the stock markets. That means a lot of things are different. But the main two things that catch out the stock traders when they try and trade forex is: price volatility and trade execution. Oh yes, they can be haphazard and if you don’t know what you're doing and you can’t do it swiftly enough, you’re going to be getting in at the wrong levels and getting whipped out before you know it.

The forex market is completely transparent. It responds to subtle movements in other financial markets much differently to the stock markets. So, trying to employ the same tactics that work on the stock market will inevitably fail in the forex market. A big number of the 95% of traders that fail in the forex market are old stock market traders. They chase their tail until it falls off!

9. Trade plans, Loss Limits and Stop loss orders are only for traders with very little cash

OK let’s get this straight, Capital Management (all the things mentioned in this myth) is the number one important component to any trader’s success. If you don’t have it, you are finished! It’s the first thing that a graduate trainee at the bank is told. You break limits, your fired immediately!

The funny thing is in the retail trading space no one ever talks about Capital Management. Which tells me once again they’ve had no real professional experience. Otherwise it would be the first thing they’d talk about. Don’t be mistaken Capital Management isn’t about reducing risk, far from it, it’s about limiting losses whilst maximising profits. The risk is always there in the market. We control it through trade plans which include the trade size, stop loss and take profit levels.

If you have no trade plan, then you’re simply planning to fail!

10. Using unconventional trading methods improves your chances of success

I’ve heard this myth repeatedly and it’s usually presented by ‘wannabe professionals’ trying to cash in on unfortunate traders who have already lost money and ready to listen to anything. If you’re looking for an unconventional method to give you the edge whether that be an automated trade robot, a funky new indicator or the like then lord have mercy on you because you’re in for a rough ride.

There can be nothing further from the truth. In fact, I’ll state very clearly you NEED to #TradeWithTheMarket, not against it. There’s nothing unconventional about it, it’s just a simple case of understanding how the bankers trade, and since they control 87% of trade volume, it makes sense to trade with them. Do you get it, if not I’ll spell it out for you?

Trade with the big guys = WIN

Trade unconventionally = LOSE

Simple right. But strangely enough many traders are too lazy to learn how to trade like the bankers, so they chase one gimmick after another and slowly bleed their accounts dry!

11. The Brokers are always trying to stop you out and take your money

I get asked or told about this myth every other day of the week! Do you know why? Because the broker market is very competitive and they continually attempt to win over each other’s clients. It’s in no brokers interest to upset their clients and take their money. If they all did this then they’d end up with no clients and that means no revenue. The business would fold.

Now there have been instances in the past, I’d say around 2005-10 where price makers were running a lot of trader’s positions, but it wasn’t against the individual trader. They managed their ‘book’ much the same way you manage your trading of the market. They would run a certain percentage of risk. If it went their way they won or against them they lost, the same as everyone else. You know what, I respect a broker that is willing to run my positions. It doesn’t mean they are pushing the stops to take your money; the market is doing that all on its own. The best of luck to them.

We deal with several brokers and I can honestly say they have the client’s best interest at heart. In fact, they want their traders to succeed because that means more turnover which equals more commissions and bigger trade volume. If the client makes money the broker makes more money long term. So, can you see it doesn’t make sense for the broker to screw you over on stop loss orders.

Summary

Be careful what you read on the internet. You should by now understand there’s a lot of fake information out there. Do your research and see who’s behind the stories or myths and just because someone says they have 10 years trading experience it’s still worth asking the question: Did you ever work for one of the big banks, and if so which one?

Tip: The quickest way to find out if a forex educator has traded forex professionally with a bank is to firstly check on LinkedIn - If they don't mention it in their employment history then beware.

​Good luck and happy trading.