6 Common Misconceptions Of Forex Trading
Jan 10 , 2020
Forex (foreign exchange or FX) is a global market formed by a vast network of participants of various social levels and locations. Consisting of traders with the highest level of expertise to complete beginners in the sphere, forex trading embodies a very wide range of desires, endeavors and goals.
It is absolutely natural that multiple misconceptions and delusions have formed over the years among such a variable market participants. These false beliefs have spread and surrounded nearly all aspects of the forex. However, it is quite often that misleading information and poor market education result in an inevitable financial issue.
Official statistics prove that the majority of investors, both novice and experienced, frequently face serious capital losses which eventually ends up in a search of other pastimes. A determinant for this perverse outcome is hidden in taking the common fabrications for the truth about foreign exchange.
It is a highly recommended option to look into some of the most widespread falseness associated with forex trading.
- The Forex Is A Standardised Exchange
Forex trading is commonly mistaken as a standardised exchange and functioning as the one. However, foreign exchange is an OTC (over-the-counter) marketplace which is a decentralized body where trades of all the market participants are taking place.
Institutions that serve as liquidity providers, also known as “market makers” quote buying or selling prices for a certain currency. Once a trading day is opened, investors place their orders which then are being executed on the market. Another thing is that forex trading is not maintained through a physical institution. In this case a regulatory body works as a regional entity. Therefore, any conflict situation will take more efforts to be resolved, unlike making a complaint against a standard exchange.
The other difference between an exchange and OTC marketplace is that the last ensures privacy. Traders and investors are not obliged to reveal their identities to each other and do not disclose their dealings to any of the market participants.
However, privacy in such transactions is often subject to transparency on the market. There are times when unclarity in regulation together with transparency issues may have influence on the market performance. So, it creates a considerable difference choosing a reliable broker that is of great help in reducing possible negative sides of attracting an OTC market when trading on forex-based assets.
- Forex Trading Is A Way To “Get Rich Quick”
The most popular belief about trading is that it is always easy earned money and the success is guaranteed. There is a great wealth of tools and instruments such as high leverage, small spreads, huge number of assets and easy access to the market which create the picture of quick significant returns. But the reality is quite opposite to this notion. Losing some capital is usually a part of a trading strategy, unexpected losses may also take place and a positive outcome, a successful trade is a result of a hard work.
A profitable trade is always realized through a consistent analysis and cold blooded execution. The trading sphere is extremely competitive, dynamic and supported by latest technologies. In the way towards achieving success traders should possess a number of defining instruments and attitudes apart from devotion and discipline. Here is just a few of them:
Decent Technology Support. This includes a fast computer or laptop, stable Internet connection and a solid trading platform.
Reliable Broker. Essential features that define the quality of your trading experience – moderate fees, active customer support service and fast market access.
Trading Strategy. An effective strategy is the heart of an effective performance. In the pursuit of stable profitability one should develop a systematic attitude to trading, follow the picked strategy and stick to risk management.
Personal Preparations. One of the crucial aspects of trading is a certain type of behavior. A trader’s decisions should always come from calculations and personal emotions should never influence those decisions. You should never let yourself be impulsive.
None of the described elements should be avoided. A profitable forex trading is always a system of rules. If you let yourself cut out even one part you will risk the integrity of the entire system. No matter how perfectly you have followed and mastered all the other areas, failing with just one of them will inevitably end up in a loss of your investment.
- There Is Only One “Correct” Way To Trade
There is no ultimate attitude to Forex trading. Every trader is a unique person and every approach to trading differs from the others. A great variety of market tools, instruments and countless opinions formed thousands of strategies. But in the end, the only strategy that makes a difference is the one that shows effectiveness.
Your own vision should always include these elements to play out for you:
Technical or Fundamental Analysis. Any trading strategy is always found on the study of the price or the factors that influence that price movement. There are strategies based on technical or fundamental analysis or even on a combination of both of them.
Duration. Strategies also have their own effective time frames. Trades may be executed within seconds, minutes, during the day or stay open for months. All of those have different goals and require various types of risk management.
Style. This element underlines a trader’s lifestyle and personal preferences. From a fully controlled manually managed account to a completely automated software.
The market gives you space to show yourself. Any strategy can be applied. A common mistake is an attempt to find a strategy for all occasions. Stay flexible, disciplined and diligent. There is no rule to follow to receive a guaranteed reward. After all, a good strategy is the one that brings you money.
- Greater Leverage Equals Greater Returns
Forex trading gives traders an opportunity to control significantly larger amount of a currency with a much smaller capital in an account. This is presented in a form of leverage. To attract new clients, brokerages usually offer tempting spreads and extremely high leverage.
Despite the fact that using high leverage seriously increases an amount of potential rewards, the risks taken are rarely justified. The higher leverage is used, the more lots are assigned to an opened trade. However, the amount of currency being risked per each pip increases enormously. The risk is always considered excessive when there is a disproportion between the balance of an account and an opened position.
In such cases the following aspects of the market change high leverage from a privilege to a disadvantage:
Market Fluctuations. Volatility is an integral part of trading. It may shoot up at any time and cause a critical harm to a leveraged position.
Slippage. It is quite rare that the conditions on the market allow to place and close large trades at any time. One should always consider having enough liquidity to prevent losses due to slippage.
Trade Liquidation. If the predefined margin requirements are violated, the broker may liquidate the open position. To avoid an unexpected exit from a potentially profitable trade one should occasionally check his account’s well-being.
Leverage should always be treated and used carefully. The opportunities it gives are, without doubt, magnificent. But the possible risks must be calculated before taking a higher leverage as increased losses that may happen as a result of an unexpected price movement can cause an irreversible damage to one’s trading account.
- Complex Strategies Outperform Simple Ones
This misconception has developed over the years as financial markets are constantly joined by traders with an academic background. For such traders the financial reward is not usually a primary goal but a challenge and an intellectual task. More and more sophisticated and complex trading strategies are created every day out of interest or as a solution to a hard math problem.
Novice traders may be interested in less complex strategies and the science of trading in general. For the majority of them advanced technical tools together with a decent automated software or algorithm makes all the necessary difference.
Choosing a simple trading strategy never means a decreased chance to receive good returns or higher possibility of a loss. Any trading plan will bring the expected reward if applied correctly and supported by dedication and discipline.
- More Is Better
It is tempting to use all the markets can offer and achieve higher financial goals. Forex trading is available 5 days a week giving a chance to participate in different markets practically round the clock. However, focusing on a certain market and a selected group of assets increases a trader’s performance.
Here is why more can seldom to be better:
Limited Resources. First of all is time. A trader should be well-prepared, spend time on actual trades and then keep a record about outcomes. A lot of beginners start to trade 24 hours, placing a tremendous number of orders. However, it is wise to work with small number of assets at one time not to spread the capital too much.
Liquidity Concerns. For trades to stay active the assets should attract enough liquidity. When a currency pair is not popular it leads to less interest in it for buyers and sellers. The difference between Bid and Ask gets bigger and the price movements become too volatile.
When the range of possibilities is broad it seems that there are new opportunities everywhere. The rule says that a trader should not participate in trades for long as he becomes more vulnerable to traps in the market. Profitability is achieved through a good night’s sleep, systematic attitude and a proper risk management.
Only a strong knowledge received as a result of a disciplined trader education can ensure a positive outcome for a trader. A lack of information or a complete misconception will eventually turn costly. So this is a trader’s main responsibility to do a proper homework before joining the market.