Myth and Reality of the Forex Market
Take a classic quote from Alexander Elder, ” How to Play and Win on the Market ” (How to Play and Win on the Market):
“If your friend does not have much experience in farming, suddenly comes to you and says that he is planning to support himself from growing crops in a quarter of the land, and you know that he will suffer from hunger. We can all imagine how many sources will be obtained from that vast land. However, in the world of forex trading , human growth from children to becoming adults will develop their imagination. ”
When a beginner receives a few punches and his capital falls below the requested margin, he will suddenly begin to lose his determination, feel fear and begin to conclude various kinds of negative thoughts about the financial market. He is like a small child who feels frightened when walking through a cemetery or when he is about to peek at something under his bed, he is afraid that a ghost will appear or peek at him. The nature of this unstructured financial market has become a fertile land for growing wishful thinking.
And our fantasies can influence our behavior, even when we are not aware of their existence. A successful forex trader must first be able to recognize his fantasy before releasing it.
Cheat Dealers and Other Myths about How Boker Works
There are three ways a dealing center works .
1. None of the client’s positions are hedged with an outside counteragent .
In this case, the dealer’s interest is the client’s loss, on the contrary the client’s profit will actually drain the dealer pocket . And this is true, many dealing companies operate with this method in the first years because they do not have a large enough forex trading volume to be able to protect the value of clients’ positions on the interbank Forex market (standard lot is 0.5 million). For dealers who are still “young” they will bear a heavy risk if one of the clients wins a forex trade in large quantities, while the company is unable to fulfill its obligations. In order to reduce this risk, dealers like this are taking steps by “helping” clients so that they lose in transactions, a practice that damages the image of industry in general.
At the beginning of the development of the Forex market, the dealing centers were even smaller, the majority of them did not have enough clients to protect client positions in the larger market. As a result, to minimize client profits at the company’s bottom line , many dealers do dishonest work with clients’ forex trading . ” Slippage “, which is the fulfillment of orders at a price that is less favorable for the client, this is one of the ways done by dealers to derail their clients’ business subtly.
Dealers those born at the beginning of Forex and who are able to survive long will get a large number of client bases. And because larger companies generally don’t want to sacrifice their reputation by making rapid leaps (in this case the quoting process ) against their clients’ costs, then the practice of dishonest dealing is moved into a low budget shift, a fraudulent dealing center ( fly-by-night ).
Has learned a lot from his experience
When a dealer manages to get a large number of clients and has learned a lot from his experience, some things are easy to understand, including the following:
- In the long run, the benefits of ” fly-by-night ” operations (which work against clients) will be the same as when they profit from spreads (the fact that company profits and losses on their 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 certainly not separated from the reputation of the company itself.
- A good reputation and the client’s long-term existence are more profitable than short-term benefits obtained through client failure in forex trading. Therefore, even though the dealers still process everything internally. In the end they still carry out unethical practices (bad execution, stop loss etc.), which are characteristic of the fly-by-night group .
- The company becomes more valuable and management does not want to lose it just because of the benefits some clients get.
- The number of client accounts is increasing (a positive sign to build a good reputation) and even some clients with large deposits are starting to emerge. Most of whom have succeeded and have more professional experience and better training.
As a growing dealing center, company management began to think of client hedging positions, and as a result, they moved into the second business model.
2. Hedging the overall client position.
This means that all client positions (previously agreed upon amounts) are subject to hedging in the main market. This of course can erase the bad image of the company regarding the motive of “resistance” to clients. From now on, successful clients no longer deliver the company to the brink of collapse.
3. Hedging for each client position on the interbank market .
From the client’s point of view, this model has no advantages compared to the second model above. Some of the disadvantages include:
- The initial balance requirements on a very large account and the minimum number of transactions;
- Slower execution.
The Myth That It Is Impossible to Make Money on Forex
Many say that 90% of those who forex trade using broker loans ( leverage ) in the financial markets ultimately suffer losses. Unfortunately, that is true. Let’s study what causes these forex traders to lose their capital. If we analyze how the “90%” forex traders are forex trading , we can listen to some conclusions about mistakes that are commonly made by failed forex traders , including the following:
Do not have an understanding of the basics of analysis.
Failed forex traders don’t understand the basics of analysis, both fundamentally and technically.
Don’t understand the philosophy behind forex trade.
I will explain it through examples that I will take from my own experience. When I was a technical analyst, at that time I analyzed the currency, namely Yen. On the weekly chart everything shows indicators with the same signal. The daily chart shows the same thing as H4 and 5m. I think it’s good because everything points in one direction. Finally the position is opened.
Results? Passion! My surprise is incredible. I went looking for beer and thought a lot about what had just happened. I realized that it was not a technical analysis error, but myself. The weekly and daily charts show that the overall movement is falling. The shortest time frame shows that trend direction movements have emerged. The ideal time to sell, if the weekly and daily charts go down. And also the 4 hour chart appears (bullish). The hourly chart shows that the upward movement has stopped (for example, when the uptrend has been divided).
Don’t understand Money Management rules :
- Do not apply stop loss at all.
- The stop loss placement is too close to the entry price . Order stop loss in the Forex market should not be less than 40-50 pips from the entry price. Stop losses that are placed too close often present a “disaster”. Because you are very unlikely to reach the top or bottom when you enter the market. This can happen around 10-15 pips. Plus 5 pips from the spread . And if you take into account market noise (10-15 pips), then stop loss orders those placed less than 40-50 pips from the entry price – will hardly have room to maintain a position.
- Not paying attention to the ratio between Profit / Loss of 2/1.
- Trying to set a profit of 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 one loss transaction. This means that the percentage of success exceeds 95% – something that even Soros was unable to do. Professional analysts predict the level of accuracy with a percentage of 75-80%.
Basing forex trading with very small fluctuations.
I think that the market reflects noise of around 10 pipsl. Plus, some market makers show slightly different prices). Let’s consider this an axiom (truth without proof). That means that Analysis with a timeframe :
- per minute allows you to capture movements at 15 pips. With 66% it is market noise(10 pips).
- per 5 minutes allows you to capture movements at 30 pips. 33% is market noise .
- with (hourly timeframes) allows you to capture movements at 100 pips. With 10% it is market noise .
- per day allows you to capture movements at 500 pips. With 2% it is market noise .
These numbers are just hypothetical analyzes. The most important thing here is the concept. Thus, we will have plenty of time to predict market noise when we want to analyze a short period of time. Market noise is difficult to predict – even though the market can be predicted – which is why we have to analyze time over a longer period.
If you have not yet succeeded in trading on Forex, then look carefully and reflect on what I have written above and draw your own conclusions wisely. In order to successfully forex trade on the Forex market, you must have certain knowledge. In addition, you also need to understand certain guidelines or rules, especially those relating to money management .
Myth about the Lack of Number of Brokers in Brokerage Companies. Or Why Does It Take a Long Time to Execute Transactions at Large Price Fluctuations Periods?
Delays can be caused by the following:
- Software ( software ) or network can not handle the pace of commercial traffic during periods of large price movement.
- The number of brokerage staff is small.
The other question is, why brokers who don’t have problems or shortcomings as mentioned above sometimes still experience delays when trying to process orders?
The most common business model applied by large companies is the model as in the work method No.2 (see above). Nnamely the company protects the value of the client’s position with the counteragent from the outside.
When market conditions are calm, brokers are able to process client transactions directly and then pay attention to larger hedges in the market (if needed). There is no reason to be in a hurry, even a broker might be able to make a leap for a few pips, better than what his client has.
Myth about the lack of capital
I will quote the Elder sentence again:
“Many forex traders fail to think that they will succeed if they have more capital. Most such forex traders will be kicked out of the game for a series of failures or even for one failed transaction. Another thing that also often happens is that this amateur forex trader closes all positions, the market moved in the direction he had anticipated , the poor forex trader was disappointed in himself or his broker, “If only I could last another week, my fate would be better.”
The forex trader who failed to interpret this as a justification of their methods. So they seek capital (or borrow) to open another account. But the same story repeats itself. The forex trader was thrown from the arena, and watched from outside the arena a market that was moving away with its direction. Then believing the analysis was correct, only a little late. At this moment, he again dreamed, “If only I had a larger amount of account capital. Surely I would be able to survive longer and make a profit”.
Some forex traders collect capital from relatives by showing their graphs as proof that they know what they should do next. However, even though these poor forex traders get more capital, they will still have the potential to lose the capital.
The biggest problem for forex traders
The biggest problem for traders who fail is not the lack of capital, but the lack of understanding of how to forex trade . A fragile forex trader can do it through accounts with large capital as fast as small ones. He plays it too much and neglects the rules of financial management. These unfortunate forex traders often place positions that are too risky on the market, even with larger capital accounts. Regardless of how great the strategies that forex traders have, conducting transactions with a high level of risk on account capital, of course, will potentially bring disaster, especially if the transaction is not in your favor, then you will be sadly thrown from the arena of play.
Before starting anything
I often receive questions about how much money I have to have in order to start forex trading. They want to have enough capital to survive until the 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 has collapsed before finishing making it. Can a surgeon kill some of his patients before he becomes an appendicitis expert?
One of the advantages of a large capital account is the relatively smaller start-up costs for your account. If you manage funds with a total of one million dollars and spend $ 10,000 for 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 total capital.
Myth about Orthopot
For 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 the steering wheel of your car.” You just sit and sleep when you travel with the car. You might laugh at such an offer. But will you laugh if someone offers you an automated system to invest in the financial market?
Forex Traders who believe in the myth “autopilot” will think that to make money can be done automatically. Some of them try to make their own automated systems, while others buy those that are ready to use. People who hone their forex trading skills for years, ranging from lawyers, doctors to entrepreneurs try to buy them with an equivalent value to their experience, namely only for the sake of an automated forex trading system.
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 a very simple way, while others are quite complex, with built-in optimization and financial management rules. Many forex traders seek fortune – an attempt to convert lines of code into sources of money that will never stop flowing. Those who spend money on an automated forex trading system remind a medieval knight who is willing to pay an alchemist for a secret about how to turn ordinary metal into gold.
Human behavior, in all its complexity, does not want itself to be replaced or controlled by an automatic 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.
If you succeed in controlling an automated system, maybe you have already applied for your retirement early and then gone to Tahiti and spent the rest of your life with 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? Isn’t it better for them to take a vacation to Tahiti and collect checks from the bro? Of course these sellers have their answers. Some of them prefer programming rather than spending time trading on the financial market. While others sell their systems just for the sake of money as their investment capital in the future.
A capable forex trader always checks his methods
However, market conditions are always changing and what happened yesterday may be different from today. A capable trader always checks his methods once he sees changes in the market. Automatic systems will not be able to make the necessary adjustments and will most likely fail.
The use of the 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 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 one good solution, if weighing unexpected events hits your account.
There are a variety of good systems that have been circulating today, but must be carefully controlled and their forex trading must be monitored. You don’t just have to activate it, but you also have to keep up with the whole process.