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.