Forex is the biggest investment markets in the world, with $5.1 trillion in daily trading volume that dwarfs the $84 billion daily equities market volume. It’s also one of the most misunderstood markets, rife with misguided opinions and half-truths.
While forex newbies are often the most susceptible to these fallacies, even seasoned-veterans can fall victim to faulty beliefs. Forex myths can be insidious and widespread.
While much of the foreign exchange game boils down to personal skill and preference, some of the conventional wisdom floating around has the potential to adversely affect the profitability of your investment endeavors.
You need a lot of money
At its inception, participation in the forex market was reserved for financial institutions, such as banks, and other big players that could make large trades. With the progression of internet technology and web-based retail trading platforms, foreign exchange trading became more accessible to individual investors.
This has also lowered the financial barrier to entry. Standard foreign exchange trading is done in currency units of 100,000, making it difficult for everyday investors to participate. Today, however, many brokers will let you get started with just a few bucks via a concept known as leverage.
Leverage enhances the financial accessibility of forex trading by reducing the amount of capital you need to get started. In a nutshell, forex leverage works by allowing you to essentially borrow funds from a broker via a margin account. This margin is in the form of a ratio, usually 50:1, 100:1 or 200:1. So a 50:1 margin means you must deposit at least 2 percent of the trade’s value into the margin account; a 100:1 margin means that you must deposit 1 percent into the account, etc. Now you can make a $100,000 trade with only $1,000.
Leverage also makes it possible for you to take multiple positions and diversify your efforts with very little capital. Five $20 buys can help your $100 principal go further than lumping it all in a single basket.
And while it can be dangerous to borrow money only to have your investment tank, forex rates generally fluctuate less than 1 percent over the course of a trading day, making the risk of losing it all a bit lower.
You must predict the market
Forex trading is a data-intensive venture. The market is at the whims of a number of geopolitical factors and changes can happen quickly as events unfold around the globe. At the same time, historical market behavior plays a large role in how current and future performance is perceived.
Many forex traders believe that the key to success is to combine past and prevailing data to accurately predict how the market will move and get ahead of the curve. This is a worthwhile goal, but the amount of time, energy and luck required to make it a reality may be a bit much for a lot of investors.
It’s not necessary for you to become a news-scouring, chart-analysing savant in order to make money in forex. Complicated trading systems that involve dozens of technical indicators don’t necessarily generate bigger returns, and having more moving parts just adds more ways for things to go wrong.
In many cases, the best course of action is to keep up with relevant news and current events and go with a simple fx trading strategy, especially in the beginning.
Forex is short-term only
Many people think forex is only for short-term investing, similar to day-trading stocks. While the quick changes that the market experiences can make it a good candidate for short-term trading strategies, forex can be a vehicle for long-term investments as well. This is especially true for investors who put their money in emerging economy currencies that are poised for growth over the next decade or so.
Investors that can stay the course and avoid jumping ship when the market is in flux can position themselves for a nice reward over a few years.
Due diligence, the key to successful forex trading, includes challenging conventional wisdom. TIOmarkets understands the forex market and makes it easy to get started.