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The Real Meaning… Part 2

Last week I introduced some perceptions people tend to have about aspects of the market and then revealed the truth or reality of those incorrect perceptions. Here are a few more I’d like to share with you:

Is what you know about the markets accurate or are false perceptions causing trading losses?

  1. “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 for example 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 but then open up again and trading resumes. They only close so there can be a settlement. 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 these are some of the most liquid, low risk (when you protect yourself with stops) and diverse markets in the world.
  2. “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 may 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 a trade, up to you. The brokers that charge commission typically have the smallest spreads by far. In short, when someone realizes how much they are paying for “commission free trading”, they then realize how cheap commissions really are.
  3. “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 shortcut 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 markets 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.

Free Trading WorkshopAs I said last week, understanding how the markets REALLY work is essential to being able to profit in the markets. If you’ve been struggling to make consistent profits using the “common” strategies found in trading books and promoted by those on Wall Street, maybe it is because those strategies are based off of false perceptions of how the market works. You can learn more about how the market really works and OTA’s simple, rule based supply and demand strategy in our free Power Trading Workshop.

Hope this was helpful, have a good day.

Sam Seiden – sseiden@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.