Hi from Andrea Unger! Today, I’d like to talk about some trading stereotypes and myths that are very widespread in trading.
On the internet – in forums as well as in the comments that are written under the videos – it often happens to read sentences that contribute to spread certain trading stereotypes and myths. As they are very widespread, I’d like to talk a bit about some of them.
One of the most common trading stereotypes is that psychology is at the basis of 90% of success in trading. In my opinion, this sentence is not true. Psychology is important, of course, but what is its real function?
Once you have a trading plan, psychology is what makes you do your best to stick to it and do what your trading setups recommend, avoiding emotions and the mistakes they can cause. Although this is obviously true, if your strategy doesn’t work properly, you will lose. You can stick to the rules very strictly, but if your trading plan is rubbish, you will lose.
It’s like dieting. If you want to lose weight, you have to stick to a diet. So, to achieve your goal, you need to be very strong, from a psychological viewpoint. However, if the diet consists in eating pudding at breakfast, lunch, dinner, and maybe also as a snack, being strong and sticking to the rules won’t make you lose weight.
So, psychology is important, but it isn’t the 90% of success in trading, as some parts of the trading industry claim.
According to another very common myth, exit setups are so important in trading systems that they are even more important than entries.
I don’t think this is true. Exits are certainly important, but not more than entries. In my opinion, exits are there to stop a trade at the moment when the reason why the trade was opened disappears. Exits can be used in different situations:
- stop loss: when the move against the trade is too much;
- take profit: when you believe that the impulse of the trade has exhausted to that level;
- time stop: when you believe that the effect of the setup lost importance because time went by;
- trailing stop: when you don’t want to give back too many profits;
- and maybe some others.
The reasons why we close something we opened are related to their entry setup. Specific exits depend on the type of entry setup we used, so entries are more important than exits.
I think that claiming the contrary is only a way to portray something as very clever although it isn’t.
Another common myth is the one that concerns the risk-reward approach. I’ve already mentioned something about 1-to-3 risk-reward in a video you can find on our channel, in which I state that having a take profit that is at least 3 times the stop-loss is absolutely not necessary.
Generally speaking, this depends on the kind of strategy we are trading. In counter trading, for instance, the stop loss can be even larger than the take profit.
Some time ago, it happened to me to talk about this with a Swiss trader in a hedge fund. The hedge fund, which is a big one in the eyes of retail traders – like we are – but a small one in the industry, manages about half a billion euros.
According to him, a strategy that could deliver a 10-15% a year with a drawdown of 25% would be well accepted by the industry. So, for the industry 25% against 10% is fine, whereas people in forums generally say that a good strategy should have a 10% gain with a 3% drawdown.
We are talking about the industry: they have money and are willing to invest it. So, if they think a strategy with a 10-15% annual gain and a 25% drawdown is okay, they must be right.
The point is that a strategy with a 10% annual return and a 3% drawdown simply does not exist. And if it existed, they would have billions under management.
Since it doesn’t exist, the industry knows that a product with a 10-15% annual return and a 25% drawdown is good, because it’s possible and in line with some of the best overall products, provided that that 10-15% annual return is made on an annual basis and for many years, not just for three or so.
So, if a strategy is promising from more viewpoints, the industry accepts it, even when it isn’t in line with our ideas of a good risk-reward strategy.
These are just three of the many myths that are widespread in trading. Read all claims with a discriminating eye, especially when there is no evidence that the author is an expert.
Most often, people write these things only to impress readers. So, analyse everything very carefully and think about it. Also keep in mind that the only way in which you can learn to properly consider what you read is to study, investigate and be curious.
I always recommend that people study a lot, as this is the best way to become a good trader.
That’s it. If there are some trading stereotypes you would like to talk about, please write them in the comments. Maybe we’ll shoot another video about other myths.
See you next time!
Ciao from Andrea Unger!