There are a huge amount of people who think, they cannot become successful Forex traders because they don't thing they have a degree, a high enough IQ or who don't have enough education. However the idea that clever people, make more money in Forex trading is a myth and we will look at why in this article.
First let's look at why, most people think that intelligence matters in Forex trading and then why it doesn't and also, why intelligent people with high education are often poorer Forex traders than those people who have a lower IQ or less formal education.
The Public View of Forex Trading
The world of trading is seen by many as a world of sharp suited brokers and analysts who look confident, talk about complex theories of trading, have a deep knowledge of economics and appear supremely confident in their ability. Just turn on CNBC, CNN or any financial news channel and you will see them giving their trading advice normally in a trading room which contains, a huge amount of high tech equipment and its easy to believe that these people know what there talking about – but do these traders, with all their resources and high intellect make big profits trading? No they don't. The facts prove this and we have discussed this myth, of large banks and hedge funds, making profits elsewhere on this site but to summarize:
The performance of the big institutions in terms of, making money on client equity is poor and an investment in T Bills or a simple Index tracking fund, with no active management, will beat most managed Forex funds. The public on the whole believes the myth of intelligence and technology being an unbeatable combination in terms of making money in FX but all they do is rack up huge fees, at the expense of client profits.
Now a broker is focused more on, making money for the company he works for than client profits so he has a conflict of interest but if you remove the conflict of interest and focus an intelligent, highly educated person on just making money for a trading account, does he have an advantage over the trader who lacks a formal education? The answer is no. In fact, if you believe that intelligence is way to make money trading the markets, you will actually find it, causes losses and a little more explanation will make this clearer.
The Educated Fool and the Way Forex Prices Really Move
Jake Bernstein an author on commodity trading, coined the phrase “educated fool” and its very apt at showing why, educated people very often make terrible traders. The educated fool is person, I have met numerous times, in my time trading the market. This person normally has a degree, high intelligence and has been used to seeing his academic ability, give him results in terms of educational achievement and also in his work life. The problem of course is that Forex markets, do not respect intelligence or reward it with profits.
The problem with trying to apply intelligence to build a trading strategy to win at currency trading is you will build one which is based upon wrong assumptions of how to make money which is - to make a method to clever to complex which will contain to many rules, to generate trading signals.
In Forex markets, ( which we have discussed elsewhere on this site) simple trading strategies by there very nature, will out perform a complex trading plan which will fail to make money in real time trading. Simple beats complex – Period.
The reason for this is – “educated fools” believe, they can unlock the code to the market by back testing various parameters, indicators and chart formations and come up with, a trading system which can make profits and they can – BUT only on closing data. They can find order in this data by, bending the rules of the strategy to make money on historical data but the in the real world, this strategy is doomed to failure – Why?
The reason is simple – going backwards you can see an order ( if you look hard enough and tweak the system rules enough) however, Forex markets are not logical, in their movement going forward ( because humans are not logical) and the price action of any currency pair, will move forward in a slightly different way in the future to the way it did in the past.
This means the more effort you make to get a system to perform on back data, the more likely it is to fail. The Forex markets are not markets which move to set equations – there anarchy where anything can and does happen to wrong foot traders. The number of traders losing their accounts to the markets, has never changed and never will and this is because – a well thought out trading strategy is not enough to make money – the real key is the trader himself. Traders are emotional beings and only a small percentage and obtain the necessary emotional control to make money over the long term. A simple method with a few rules is far better than a complex one and the winning trader knows this and also knows, trading discipline and emotional control, are needed to make the strategy make money.
I have met many “educated fools”, who believe intelligence and logic can beat the market and they are doomed to fail due to the fact that, they are making assumptions about the movement of Forex prices which are simply not correct. Another problem with intelligent people is they come to the markets with an ego – their used to success and getting what they want and when they don't get it, their emotions get involved and they start to do things which will ensure they lose like – changing their system rules constantly, running losses, trading with to much leverage to get profits back and chopping and changing their trading methodologies constantly in pursuit of the perfect trading system – to name just a few mistakes but there are many others and there all caused by the markets not doing what they want or expect, based upon their false logic of market movement.
Academic Intelligence V Inner Knowledge of Oneself
Inner knowledge of oneself is not dependant on academic intelligence and anyone can look within and get the mindset they need to execute a simplistic trading plan for profit. Trading systems which are simple and can make profits are very simple to learn and many are so simple, a child could learn them. So getting a methodology, to make money from Forex markets can be learned by anyone regardless of IQ, intelligence or academic ability but the real key is knowing your strengths and weaknesses as a person ( and a trader) and conquering the enemy within which are, your emotions and then, applying your trading rules and signals, with confidence and discipline.
Academic intelligence is not needed to become a professional Forex trader and as we have seen, it can actually cause a trader to lose. One of the best things about trading currencies is anyone has the potential to make money and its a business which is open to everyone regardless of whether they went to college or not – the real secret of winning is to know the impact of emotions on your trading, learn to manage and control them and trade your method with disciplined application to achieve Forex trading success – sounds simple? It is so never look up to a bank trader or broker again – chances are you can do better trading from home.