THERE is no question about the sheer influence and rising popularity of foreign exchange (forex). Yet myths and misconceptions still cling to the most significant financial market by trading volume. There are positive and negative myths about forex. Both are equally in need of clarification.
1. You need a lot of money to start
This hasn’t been true for almost two decades. The myth is debunked every day by many new traders who come into this dynamic market at an hourly pace. Over 1,200 forex brokers compete for these new clients and regularly improve their trading conditions.
The decentralisation that came with the internet goes hand in hand with the democratisation of the once-elite forex domain, opening up to regular people around the world.
The journey with forex trading can start with a relatively low initial deposit, depending on the broker and its conditions.
2. A high level of leverage is good
High leverage is not necessarily “good”. To be more precise, look at it not as “good or bad” – but rather as “risky or safe”. High leverage shouldn’t be applied too often within the framework of proper risk management, especially by beginners and intermediate traders.
Experienced traders who have some spare capital to experiment with – a small fraction of their portfolio – can try a high leverage play with a new and promising trading strategy. The potential gains could be considerable, but the losses would eat up the initial funds quickly.
Never invest or trade more than you are willing to lose. That’s true for any leverage ratio.
3. Easy and quick money with forex
This might be the strongest myth about forex that unjustly attaches the “gambling” accusation to the service. There is no such thing as “easy money” with almost anything – especially on a regular, honest basis.
Money is hard-earned. If someone trades forex successfully, this person puts much time and effort into developing psychologically, mentally, and intellectually as a trader.
Research the market, read the literature, use online forex education that brokers grant, and follow well-conceived trading strategies. Plus, always utilise proper risk management tools. Instead of “easy and quick money”, hard-earned and lasting profits will follow.
4. Is forex only suitable for short-term traders?
Many people trade on a day-to-day basis, tracking the movements of an asset short-term. Because of the lucrative but risky option of high leverage, this has become quite popular. Popularity is not a measure of how forex should or could be traded. Long-term strategies can be applied just as much.
Traders of long-term trends have a different psychological approach since they are less concerned about what happens with a financial instrument in a single day. Those market traders who find themselves managing long-term trading have one more advantage on their side: they save capital on the spreads paid per order.
Spreads are the forex “commission” incorporated into each open order. Rather than paying many daily spreads equivalent to opened orders, you pay much less spread since you have fewer orders over a more extended period.
5. The forex market is rigged
Out of frustration, many former and current forex participants believe that the market is actually rigged. They think some authorities or insiders manipulate or control the market to exploit the ordinary traders’ positions to cheat them out of their funds. There has never been conclusive forensic evidence for a systematic, ongoing foreign exchange market manipulation.
Historically, there were instances of powerful and extremely wealthy players who exploited and took advantage of temporary institutional weaknesses, like in central banks. But this rare, criminal behaviour is possible in any market and is not a hard-wired attribute of forex.
6. You can predict the market
Of course, you can’t. But many participants trick themselves into believing they can. This is a psychological trap someone can get into, which can eventually lead to losses. The only way to go is to deal with probabilities – backed up by research, technical analysis, solid psychological foundations, and a valid risk management strategy. You should never make trading decisions on hunches, gut feeling, or intuition alone.
Anyone claiming they can predict the market or promise to sell you the skills to do so is not trustworthy or reliable.
7. The more trades you make the better
You can quickly lose the organisational and analytical overview if you have too many active orders – unless it is one or two assets that you know inside out. First, get accustomed to keeping track of one to two orders a day and find a realistic template of how many motions you can handle simultaneously.
If you start losing track of an asset, you have overloaded yourself: bring the total of trading orders back down to a manageable amount.
Some successful traders open many orders to maximise their profits. However, this is a testament to their skill development and experience gained over a non-trivial period.
Focus on quality and not quantity. Focus on taking the one good trade each time. Just do the math, all you need is one solid trade on average per month to enjoy the 2% to 5% return. Why trouble yourself by taking so many trades only to end up having just about the same results? And worse if that makes you more susceptible to unnecessary mistakes.
This article is contributed by international forex broker OctaFX.