With an average turnover in excess of USD 5.3 trillion per day (according to the preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity), forex (FX) is thelargest market in the world in terms of volume of trading.
Like any other trade, forex trading isn’t without its fair share of myths. These myths can potentially affect any trader, seasoned or novice; so knowing and steering clear of these myths can save them unnecessary frustrations.
Below, we look into some of the most common myths about forex trading, which will be helpful for those who are thinking about trying their hand at currency trading.
1. Forex trading is easy
This is the most common of the myths about forex trading. “Read a book or two, set up a brokerage account and you are ready to make daily profits in the forex market.” Well, if you are thinking about jumping into trading forex, it takes a lot more than just reading a book or two.
Understand that trading is anything but easy. If you are dreaming about a quick buck trading the forex market, you’re in for a rude awakening! Some might suggest, “Download and set up an Expert Advisor Software and you’re sure to make big money trading FX.”
Installing a piece of software may be easy, but being able to use the program effectively to for maximum profit requires a certain level of understanding of the market. The successful traders in forex not only put a lot of effort into what they do, they also have acquired years of experience to be able to place winning trades.
2. You need a degree in economics to trade forex
It is true that foreign exchange requires an understanding of world economics to a certain extent and that having a general idea of economic concepts is helpful in trading forex. Nevertheless, it is not necessary to have an advanced degree in economics and understand every economic principle to be trading currencies.
Many forex traders come from diverse academic backgrounds. To be a successful trader, what you need is a good head for numbers, an intuition to help you guesstimate where the market is heading and the ability to react quickly to market-moving events.
3. You need to predict what is going to happen in order to make money in forex
Since geopolitics has a big influence on the forex market, the traders who make money are the ones who are quick to react to the things happening around the world, rather than the ones making predictions.
Trading predictions can sometimes be made. This may be possible by analyzing the charts and recognizing certain patterns that have occurred in the past and assuming they might occur again. But for the most part, it is rather the quickness of reaction that makes a trader money instead of novice predictions which may or may not come true. A good trader is always alert, reads and interprets the news and is always willing to learn and evolve.
4. You need a large sum of money to trade in the forex market
There was once a time when only larger international banks and financial institutions could access and trade in the foreign exchange market. Thanks to the advent of electronic trading, those days have come and gone. Instead of launching a full blown and costly brokerage firm or bank, a small organization can simply launch a forex white labeland be able to run a forex trading business very economically.
Furthermore, now that the forex market has become accessible to small traders through forex brokerage accounts, anyone with a reliable internet connection and a relatively small amount of money can trade currencies online. Nowadays, a brokerage account can be opened with as little as $25.
Of course, trading with $25 will probably not bring in as much profits as trading with $25,000. Nevertheless, a novice trader can hone his/her trading skills with smaller amounts first.
5. You need to watch the market 24 hours a day to be successful
The forex market is open 24 hours a day and requires a lot of commitment from traders who want to succeed. But that doesn’t necessarily mean that you need to watch the market 24 hours a day to make money.
Some traders even have regular jobs. They manage to allocate a little time from their daily schedules to trading, which allows them to execute some trades at the end of the day – and still make a good income doing so. You don’t really need to sit in front of a computer staring at charts all day long.
Besides, there are automated software packages available in the market that do a lot of the work for you.
6. Being unconventional improves your chances of success
Being conventional or unconventional does not have much to do with a person’s chances of success trading forex as much as one’s understanding of the FX market, its drivers and the factors that influence foreign exchange rates.
Rather than trying to be unconventional, good traders learn and adapt to the changes in the market, which improves their chances of success.
7. The higher the leverage, the better
Trading forex on margin carries a high level of risk. A good trader knows that the higher the leverage, the higher the level of risk because the multiplicative effect of the trades is higher. Trading with relatively smaller amounts of leverage reduces the possibility of losing all your funds, while trading with high leverage could lead to large losses that even exceed your invested capital.
It is true that you can get lucky and have higher leverage work in your favor, but the reality is that you have an equal chance that it can work against you. Why take that chance?
8. You can get rich quickly in forex
In Forex, there are quite a few short term speculators who jump into the market hoping to get rich quickly with very little effort. Unfortunately, quick prosperity is rare even in the world’s richest market.
Trading takes a fair amount of effort to master, as well as significant patience and consistency. The impulsive gambler mentality seldom works in the realms of foreign exchange.
9. The more complex the strategy, the better
Complex is not always better. Although complicated trading strategies may sometimes bring you big returns quickly, it rarely ever happens. In fact, complex strategies in trading often prove much more difficult to execute and earn a profit with.
Good traders often stick to simple strategies; strategies that make them money. In forex, even the best trader wins only a few more times than he loses, making a profit from the difference. Consequently, tweaking strategies to make them more complex may be detrimental and only increase the overall risk.
10. The market is rigged
When too many bad trades are made, some traders often complain that the market is rigged or that the brokers are corrupt. While it is true that a country’s currency can be controlled by governments and central banks to a certain extent, forex, as a market, is not a scam.
The truth is that forex is too liquid and volatile to be rigged. Forex rates change often and disciplined traders are there to take advantage of the fluctuations using winning strategies. If you are making too many losing trades, think about the most likely culprit: that you need to spend more time learning to trade rather than the market is rigged.