Truth and Fiction in the Markets

This is a repeat of an article published several years ago on stock market myths, but I thought it was a good topic to revisit.

So often at Online Trading Academy I speak with market speculators, both new and experienced, and realize they are talking about something they think they completely understand when in reality their perception of the truth is very wrong. While I certainly don’t know it all and still very much enjoy learning myself, I thought a short article on “Truth” vs. Myth” in markets would benefit you.

1. “The Spot Forex markets are a trillion dollar market.”
   While this is true, you and I (retail trader) don’t exactly trade that market. Many Retail Forex brokers make markets from quotes they get from banks and then typically widen that spread and pass it on to the retail trader. Essentially, a retail Forex trader at broker “X” is trading the Forex market made by broker “X,” that’s all. This is why people often ask me the following question: “Why is it that the bids and offers on multiple Forex trading platforms are sometimes a little different, at the same time?” The answer is because they are market makers. If you are a struggling Spot Forex day trader you may want to consider trading Forex Futures instead, as that is typically a more level playing field with many benefits not found in the Spot Forex market.

2. “They have good earnings and a broker upgrade so the stock must go up.”
   As a trader who needs novice money to come into the market each day, I would tell you to please buy every time you hear good news on a stock. As your friend, educator and proponent for truth, I suggest you look at upgrades, downgrades and earnings for what they really are, news… While the price of a stock will certainly move on earnings, an upgrade or downgrade, which direction they will move and where price will move to is 100% a function of the willing supply and demand at each price level for that stock. Quantifying supply and demand can only be achieved by analyzing a price chart. Often, good news will bring price to a supply level where the astute market speculator will have a quality shorting opportunity. Just as often, bad news on a stock will quickly bring price down to an objective demand level where the astute trader is offered a low risk buying opportunity. The goal is to buy low and sell high. When the news is good the price of the stock is hardly ever low so use caution regarding this market trap disguised as opportunity.

3. “Futures trading is high risk.”
   Let me start by saying that if you don’t use protective stop orders to manage your risk, trading anything becomes high risk. If you do use protective stop orders, futures all of a sudden can become lower risk than stocks and here are a couple reasons why. First, most of the futures markets we trade are open close to 24 hours which means the overnight gap risk goes away. They all close each day for a short period so there can be a settlement, but then open up again and trading resumes. Second, the major futures markets we trade at Online Trading Academy are some of the most liquid markets in the world, which means they are as close to a fair trade as there is and you don’t have to worry about slippage that much, though it can happen. I have been trading many different futures markets for many years and they are some of the most liquid, low risk (when you protect yourself with stops) and diverse markets in the world.

4. “Commission free Spot Forex trading.”
   This is a play on words designed to get you to open an account and trade often. Some brokers offer this and it’s fine if that is what you are looking for. Consider however, that you will be paying a spread that can average 2 or 3 pips which could mean $20 or $30 dollars in hidden commissions. You can pay that to enter a trade or you can open an account and trade through a broker that charges a commission of perhaps $2 – $5 dollars a trade, up to you. The brokers that charge commission typically have the smallest spreads by far (.5 – 1 pip for the majors during heavy trading hours). In short, when someone realizes how much they are paying for “commission free trading” they then realize how cheap actual real commissions really are.

5. “I am brand new to trading; I should start by trading stock options.”
   If you are looking to trade stock options, yes, you will need to learn to trade stock options. If you are going to the option markets purely for leverage, consider that you are about to embark on a very difficult journey as options are not easy to understand for the new option trader. The big mistake people make who begin their trading career in Options is that they think they can apply options strategies and make money with those alone, without focusing on the underlying market direction. The most important issue here is that some people believe that trading options is a short cut to profits because you don’t need to understand market timing. This is another trap that gets people into trouble. Have you ever wondered why there are so many options strategies? The answer is because most options traders can’t time the market’s turning points, in advance, with a high degree of accuracy. Once you get beyond simple buying and selling of puts and calls, every strategy is some form of a hedge which decreases profit potential. The reason to hedge your bet is because you don’t know where the market is going. If you want my thoughts, learn to trade the underlying market before learning to trade options. Understand the rules behind proper market timing and increase your chances of success with options trading.

Always remember, education is NOT the answer, often it is the problem. Proper education based on reality is what separates the astute market speculator from the novice, ill-informed consistent losing trader.

Have a good day.

Learn to Trade Now