So you want to start trading Forex, but you’re not quite sure how to tell fact from fiction. There are a lot of myths about Forex trading, but we’re here to set the record straight. Let’s break down six of the top myths aspiring investors hear about the Forex market.
Myth #1: The Forex market is similar to the stock market
Oftentimes, new Forex traders believe their stock market success will automatically lead to trading the foreign currency market. However, that’s simply not accurate.The Forex market has its own rhythms and patterns that separates it from other financial markets, and there are many significant differences between the two.
For one, the Forex market is open 24 hours a day, excluding weekends. That allows for four times the amount of volatility, compared to the six hours a day the stock market is open. Additionally, unlike in the stock market, brokers for Forex are not regulated, and often put their own priorities above their clients.
Myth #2: You can earn 24 hours a day in Forex
Many traders think just because the Forex market can be traded at any time, it’s easy to earn trading no matter what time you start. However, Forex traders must keep an eye on time zones, consider market volatility, and pick what currencies they’d like to follow to find peak hours for each market.
Myth #3: Forex market trades are commission-free
While Forex traders don’t pay a commission fee for their trades, they pay the spread instead. The spread is the gap between the bid price and the ask price. These fees are not fixed, and there’s a spread on every transaction, so you do pay a fee.
Remember, Forex trading is largely unregulated, so Forex brokers aren’t required to be held to the same standards as stockbrokers. They may be looking out for their own best interest. Keep an eye on your spread prices to prevent losing your profits on fees.
Myth #4: The more complex your analysis, the better
The simpler the strategy, the more straightforward your trading plan can be. Overcomplicating your analysis is dooming yourself to fail. Sometimes, the simplest strategy is the best. While you should always make every attempt to triple-check your analysis, if you try to look at every influence on the market you’ll drive yourself crazy. Pick a pair, do the research, and follow techniques for analysis that have been historically proven and back-tested.
Myth #5: Forex market movements are arbitrary
The Forex market, like any financial market, can be subject to volatility. However, that does not make its movements random. Currency pairs often follow certain trends and patterns. Otherwise, successfully performing technical analysis would be impossible. Following the prevailing market trends can be beneficial for traders.
Using technical analysis, traders advantage of these trends. If they are familiar with fundamental announcements that can impact the economic strength of a currency pair, this gives them an even further advantage.
Myth #6: More leverage = more opportunities
While many trading “gurus” tout the high leverage allowed in the Forex market as a magic key to unlock huge profits, the truth is leverage can work against you too. Remember: there’s no such thing as guaranteed returns in the Forex market. Anyone who tells you otherwise is trying to sell you something. Tantalizing promises of unrealistic returns have to be taken with a grain of salt, and traders should always stick to a reasonable equity management plan. Trading with relatively small leverage helps minimize account exposure, and reduce risk. On the flip side, the higher the leverage, the higher the possibility that you could sustain large losses.