10 Forex Trading Myths Busted
The exciting and rewarding world of forex trading is more accessible than ever, with funded trading accounts available to those with even modest sums to invest. However, as with any rapidly expanding investor market, there’s some misleading information doing the rounds.
It’s important to check that anything that you hear about the sector is from a valid source. Acting on wrong information could damage your progress, or even lead into serious loss-making territory. Here are some of the most common myths you might hear about forex trading, and how to sort the fact from fiction.
- It’s an easy way to make a fast buck
While it is possible to make large profits from a low investment, it takes skill, time and practise to achieve this level of success. Forex trading is -definitely not for those seeking a get-rich-quick scheme. If you want the chance of immediate riches with no effort, you would be better off buying a lottery ticket.
- More trades mean more profits
This is a very common misconception about forex trading. Maxing out the number of trades that you make is not the path to instant profits. Forex trading is all about quality over quantity, even for the most experienced of traders. Beginners are advised to stick to the major currency pairs, such as USD/EUR and USD/GBP.
New traders can often be lured into a false sense of security after a winning streak, and take more positions, or invest more. However, the forex markets move extremely fast, and what was a flush of success can soon turn into a loss-making endeavour. It’s important in forex trading not to let your emotions rule your head.
- Forex trading is for high-net-worth individuals
The saying goes that the best way to make money is to have money, and it’s true that you do need some capital to invest upfront. However, the point of entry is surprisingly low, and no barrier to those on a modest income. You don’t need to have vast amounts of cash to dabble in forex trading; you can get going with under £500.
In fact, the majority of forex trading is now carried out by casual traders rather than high powered city types who are hardened by years on the trading floor. It’s affordable, easily accessible, and there’s a wealth of information out there for anyone wishing to learn the ropes.
- Good traders don’t make losses
A very common misconception is that it is possible to be right all the time, and never make losses on your trades. The truth is, that losses are an inevitable part of the trading game, and happen to even some of the most experienced traders. The only way to minimise the chance of making losses is to cultivate a solid strategy and stick to it.
As you gain more knowledge and experience of the markets, you will learn how to stack the odds in your favour. You will know how to work within your risk tolerance, and how to read the market conditions. There really is no magic beanstalk that leads to a string of endless success and huge profits!
- The market is fixed against traders
Casual traders who have been disappointed with their performance sometimes claim that the forex markets are rigged against traders. This is simply not the case, as it is impossible to completely predetermine a market as liquid and dynamic as the forex markets.
The foreign exchange market is entirely legitimate, although like any large financial market, there is the possibility of fraud occurring. However, the markets are robustly self-regulated by the Commodity Futures Trading Commission and the National Futures Association (NFA).
When choosing a broker for forex trading, check that they are registered onshore, and are included on the NFA database. Also check out reviews on sites such as Trustpilot, just as you would when researching any potential purchase or service.
- You can turn news events into easy profits
Events reported in the news, relating to political, economic or geographical affairs, can and do impact on currency values. However, it is not as simple as scouring the media to try and anticipate how the markets react. It is very difficult to make money this way, unless you have advanced knowledge of statistical analysis, and prior access to information.
- A stop-loss order is the only risk strategy you need
Successful forex trading is impossible without a full risk management strategy. To avoid getting drawn into an unmanageable situation, you need to do more than just use a stop loss order.
Be honest about your financial circumstances, and know how much money you can comfortably afford to lose with each deal. Make an assessment of your income and outgoings, and the percentage of your savings you are willing to play with. This will give you an idea of the degree of variability that is available to you in your profit and loss margins.
Even if you have plenty of capital at your disposal, you will still need to do more than avoid worst case scenarios to be a successful forex trader. Beginners should start small, risking no more than 1% or 2% of their total capital per trade at first.
The road to lucrative trading does not lie along taking big risks, but rather through developing a robust and careful risk management strategy. Stick to a low-risk program until you feel that you have some solid experience under your belt.
- You can only learn how to trade from videos and books
You certainly need to learn the ropes before you enter the world of forex trading, and reading up on technical details and techniques is important. However, in the end, it’s your money at stake, and no one has a more vested interest in that than you. There is always an unknowable element to trading, because the market is so liquid and dynamic.
Even the greatest experts can’t teach you everything you need to know, and even the most experienced traders make losses sometimes. Like driving a car, in the end you are on your own out there, and will have to make your own judgment calls to navigate your way around the system.
Developing the right trading mindset is just as important as learning about the technical elements. Remember that experienced and successful traders make objective decisions, and refuse to be tempted by greed for greater profits, or to become over-cautious through fear. They have the ability to make logical decisions within a short timeframe.
Some people find that learning mindfulness techniques, which teach you how to centre yourself in the present moment, work well for them. If you think that this sounds too woolly for you, remember that top professional athletes often use such methods to stop them ‘choking’ at high-pressure events.
The power of the mind to subconsciously influence our emotions and decision-making process should not be underestimated. Knowing when to step back, and when to stick to your guns, is an art that can be mastered through practice, experience, and learning from the odd mistake!
- It’s too complicated
Having stressed the importance of learning and developing a strategy, it’s just as important to remember that a more complicated strategy doesn’t generally increase your returns. Therefore, once you have worked out a formula that brings modest rewards, you should remain consistent in your approach, rather than enter a rabbit hole of tweaks and turns.
Keeping yourself well informed about world economic events will give you an edge as a trader, because macroeconomic factors are what drives the currency values. To a certain extent, some understanding of economic principles will help, but it’s not necessary to be an expert or hold a degree in this area.
- It’s a full-time job
Although the forex markets are open almost 24/7, it’s a myth that you need to spend all your waking hours monitoring charts and graphs in order to get ahead. In fact, the majority of forex traders have full-time occupations, and dabble in the markets at evenings or weekends.
As the major financial markets are most active when they open at 8am UTC, it’s possible to fit in trading around regular 9-5 hours. It’s perfectly feasible to top up your income from trading profits, simply by committing to a few hours a week. It is important to have a disciplined risk management strategy, but this can be fine-tuned as you go along.
As we have mentioned, there’s no great mystery to successful forex trading. Anyone can learn the basic principles, through online forums, talking directly to other traders, and reading up on techniques. It does take some time, but your patience will be well rewarded if you maintain a consistent approach.
All this is to say that forex trading is now more accessible than ever before, and there is no reason why anyone with a certain degree of financial savvy should not make a profit. Many people find it is an excellent way to top up their salary, without taking unreasonable risks with their finances.