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Forex Myths

October 14th, 2011 @ 5:54 pm by Michael Radkay

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BY <a href=”http://www.rdstrader.com”>STEPHANIE RADKAY</a>

<div style=”float: right;”><img src=”http://www.rdstrader.com/castle.jpg”></div>Long ago in the ancient land of Tradeopolis there lived a king, King Libra.  This king was a very kind, intelligent, giving, sharing soul.  The thing that was most unique about King Libra compared to any other king was he was more like a God.  His people and the surrounding kingdoms often prayed to him and bowed to him in his presence for he had such great intelligence and knew everything there was to know.  The people in Tradeopolis respected him greatly and when anyone was in need they would go to him to help solve all their problems.

One day one of his people, Fast Market Freddy, came to King Libra and told him he wanted to trade Foreign Currency.  “Ah, yes,” said the King,  “what a brilliant idea.  You know you must have money in your pocket and in the bank to do this, Freddy.”  Fast Market Freddy answered, “Yes, I have that covered, King.”  King Libra said, “You must have the emotional and physical endurance to be successful because not everyone can do this.  You will learn more about yourself than you might ever care to know.”  “I understand,” replied Freddy, “I take care of myself physically by working out and eating right.  I meditate and understand my emotions.  I don’t let them get the best of me.  I am a model citizen in our kingdom, giving to others and respecting my family.” “Perfect”, King Libra replied, “so what is it you need from me?”  “Well”, Fast Market Freddy said,” I want to know how long this will take me to learn.”  “Ah, yes,” replied the King, “to answer your question, you must go to see the three Wise Wizards, TOLI, TOLI-O and TOLI-O-O, in that order.”

<div style=”float: right;”><img src=”http://www.rdstrader.com/tol1.jpg”></div>So off Fast Market Freddy went to first seek the advice of TOLI.  He approached TOLI’s beautiful castle and knocked on the door. “What is it you wish to know?” bellowed the voice behind the door. “It is I, Fast Market Freddy, and King Libra sent me to seek the advise of the Wise Wizard TOLI.  I want to start trading Foreign Currency and I want to know how long it will take me.” The Wise Wizard, TOLI, opened the door, touched Freddy on the chin with his pointer finger and answered, “Six months.”  “Six months?” anxiously replied Freddy, “I don’t have six months to wait.  I have bills to pay, children to feed and a wife who overspends.” “I see. Since you do not appreciate my wise answer, I advise you to go see the Wise Wizard, TOLI-O.”

<div style=”float: right;”><img src=”http://www.rdstrader.com/tol10.jpg”></div>And, off Fast Market Freddy went to seek the advice of Wise Wizard, TOLI-O. He quickly approached TOLI-O’s beautiful castle and knocked heavily on the door. “What is it you wish to know?” bellowed the voice behind the door. “It is I, Fast Market Freddy, and the Wise Wizard TOLI sent me here.  I want to start trading Foreign Currency and I really want to know how long it will take me.” The Wise Wizard, TOLI-O, slowly opened the door, touched Freddy on his forehead with his pointer finger and answered, “One year.”  “One year?” Freddy started to yell, “What’s the matter with you?  One year is ridiculous!  I don’t have the time for this and you are crazy!”   “I see. Since you do not appreciate my wise answer, I advise you to go see the Wise Wizard, TOLI-O-O.”

<div style=”float: right;”><img src=”http://www.rdstrader.com/tol100.jpg”></div>Stomping his feet, Fast Market Freddy marched over to the even more beautiful castle of the Wise Wizard, TOLI-O-O.  He knocked heavily on the door. “What is it you wish to know?” softly questioned the voice behind the door. “It is I, Fast Market Freddy, and the Wise Wizard TOLI-O sent me here.  I want to start trading Foreign Currency and I demand to know how long it will take me.  Now give me the answer I want to hear!” The all-knowing wizard opened the door, touched Freddy gently on the forehead with her closed fist and quietly replied, “A lifetime.”  “Oh, you are out of your mind, TOLI-O-O!  That’s so unreasonable and no one would ever do this!  I am out of here!”  Fast Market Freddy almost put his fist through the Wise Wizard TOLI-O-O’s beautiful Golden Doors and stormed off in a huge huff.

There is a hidden message in this trader’s fable and the hint is knowing the hand signals on the trading floor. If you can figure it out, send an e-mail to info@rdstrader.com

If you are the first “new client” to respond, you will receive a free 45 minute consultation with 20 year professional trader and mentor, Michael Radkay.

Trade Strong!! Trade Smart!!and Always Have Enough to Trade Tomorrow!!

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April 24th, 2007 @ 11:43 am by Mihai Marinescu

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The title of our blog discussion already prompted reaction from our traders… Paul admits that if using stops makes him a sissy then he must be so when it comes to trading. Along the same line of thought I must admit to be one too, and I believe most professional traders could also be considered “sissies”, for the same basic reason: they refuse to trade without stops…:) Don’t worry Paul, I was just trying to make a point – neither I nor any of our instructors would ever advise anyone to trade without a protective stop… However this myth circulates among traders, we have heard this phrase more than once, which is exactly why I think it is important to clarify certain points with regard to the use of stops when trading on Forex.

I mentioned from the very beginning that we are considering the “sissies” to be more sensible then the “neckbreakers”, and in what follows we will explain some of the reasons why. However, those who believe trading without stops is preferable have some arguments of their own, that I will try to expose in brief in today’s article. So, why do the “neckbreakers” prefer “walking on a tight rope without a safety net”, as Sunil put it?

First, there is a technical argument. Some trading platforms suffer technical problems from time to time, and as a result price sometimes displays huge spikes of hundreds and sometimes even thousands of pips up or down in only a few seconds. Of course, any stops at any distance in the direction of the spike will be wiped out instantaneously, and the trader will get his trade closed for no reason, while all the other platforms perform without any problem. I suppose we can all understand that such a situation could make any of us mad…

Some traders believe that not using a stop at all will protect them from such situations. If their trading balance is big enough compared to their positions in the market, they might be right, too… These spikes are essentially errors, and they are corrected in a matter of seconds, after which price goes back to its normal movement. Our traders may be right inasmuch their trades would probably not be stopped out by such rare events. However, I personally experienced this problem with all the brokers I have worked with and I can say that even if my stops were hit on such an erroneous spike, all positions were eventually rolled back and I got out of the situation with no harm or loss of any kind in my account. Once I was even credited an unrealized profit just because without the spike I might have reached the target of my trade!
Of course, these highly improbable events are still possible and your broker may not be such a nice guy, so there is a possibility that you lose something after such a problem after all… Nevertheless, this is definitely not an argument in favor of not using stops when trading, due to some very sensible reasons: 1) these events are very rare; 2) even if they happen, respectable brokers always roll back all positions after the event so no harm is done and 3) even if your stop is hit- if it was placed correctly – this will not be a catastrophe and your account will not suffer much anyhow, so there is really no reason to make such a big deal about it.

Then, there is the argument of stop hunters… I must admit I personally consider this to be a point to be taken seriously, as all of us know there are many stop loss hunters out there, and placing our stops close to the market price will give them the tools they need to fight individual traders and win the battle. Especially brokers which act as market makers can manipulate price action in such a way that stops have a high probability to be hit if they stand around certain key levels… Basically, what the neckbreakers say is that they do not want their money to go to such sharks, and they prefer to keep their stops mental.

My answer to all this is yes, I admit such things may happen, and as much as that might bother us it is not really in our power to change market mechanisms and realities that have been there for decades… However, I would like to draw attention to 2 important points: placing a stop and getting it hit by a stop hunter is definitely annoying, but we must be smart choose the smaller risk…If our stop gets hit, we will live to trade another day, however if our trade goes hundreds or thousands of pips against us there may be no tomorrow for our trading account. The market is sometimes punishing us, and this is part of the business, what is harder to accept is to end one’s career just for being proud enough not to place a protective stop. Secondly, this reality prompts us to set intelligent and technical stops on our accounts and not mere dollar-value or round-number ones… Placing a stop is one thing, HOW and WHERE we place it, well, that’s an entirely different story… And this is where education can make the difference between a successful trader and one who can only watch some charts on a demo, wondering “what if”.

Thirdly, there is the “I know what I’m doing” argument. I mean, some traders just “KNOW” the market will go up and down, and as a result they feel no need to place a stop since there is nothing to be protected against (If the market WILL go up, it can’t go down at the same time, right?). I think there is no need to comment on such a childish attitude, and of course any trader who thinks like this has no idea in what danger he is placing himself… Actually, it doesn’t even matter much if he places stops or not, unless he changes his view of the market failure will be for him just a matter of time – maybe not today, maybe not tomorrow, but eventually the market will eat him up and feed his account to the sharks.

Will be back with some more pros and cons on using protective stops…

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April 20th, 2007 @ 11:26 am by Mihai Marinescu

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OK, here we are attacking another classic traders’ myth which on Forex – because of the market’s high volatility – becomes a matter of a trader’s life and death.
We must have heard this dilemma a thousand times: should we, or should we not use stops when trading? Some say stops are for sissies… Others say trading without a stop is suicide… Arguments are on both sides, and in our next posts we will try to unveil some of the reasons why we believe the “sissies” are more sensible in their approach than the “neckbreakers”.
If we place stops, they will be there to protect us from large drawdowns… But then again, if we don’t place any stop there will be nothing to be hit, so money will just flow in and out of the trading account freely… Will that work in our favor, or against us? Can that make us rich overnight without any effort, or will that simple trade that we took and finally went wrong eat up our entire trading account because we failed to place a stop?
These are all questions we will try to find an answer to in what follows.
(to be continued…)

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March 19th, 2007 @ 5:02 am by Mihai Marinescu

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We have seen in our previous posts that there are many dangers awaiting those traders who use high leverage when trading this volatile and unpredictable market.

Let’s now have a look at the other side of the coin…

If leverage is dangerous, then using a very small one – or none – should protect a trader against any danger resulting from trading large positions, right? WRONG!

This confusion is caused by a misunderstanding of the word ‘leverage’, which can have at least two different meanings.

First, leverage has a purely technical meaning and refers to the instrument offered by a broker in order to boost a trader’s power to make profit (or suffer losses). Broker X can offer a 50:1 maximum leverage for trading on its platform, while broker Y may offer a 400:1 maximum leverage.

When we are talking about leverage in its technical aspect, there is nothing wrong with using the highest leverage allowed by the broker. It is not the use of this instrument per se that places us in a risky situation, and in what follows we will explain why. Read the rest of this entry »

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March 13th, 2007 @ 8:36 am by Mihai Marinescu

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The first aspect of our leverage myth refers to the belief that a high leverage can work in favor of the trader, and even compensate for losses in periods when trading does not give the expected results.

A trader that is aware of what leverage can do for him may tend to increase the size of his trades as losses accumulate, hoping for a recovery in the very last moment. This approach can only work against the trader, and usually leads to margin calls and huge losses in trading accounts.

Whenever a trader tries to apply a casino player mentality to trading (on purpose or not), the probability of his success is in fact much lower than if he were gambling in a casino with a 50%/50% chance. Read the rest of this entry »

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March 9th, 2007 @ 6:49 am by Mihai Marinescu

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The first thing a rookie learns about leverage is: a trader cannot do without it.

It is a sort of necessary evil, a big bad wolf that keeps showing up…. The higher you set your leverage, the higher your risk – but still, unless you use it, you cannot make good profit. Tricky…

Even if everyone is talking about leverage and almost everyone believes to have understood how it works, there are still so many misconceptions about this concept that cause traders to lose money.

We will start by analyzing together two of the most common misconceptions about leverage, and point out how a half-truth can turn into a big fat lie, when our emotions and greed decide to take over. Read the rest of this entry »

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