Facts and Myths about Forex Trading

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What are the facts and myths about forex trading? This article exposes 7 of the most common myths about trading foreign currencies.

1# Trading is too risky

Every decision we make in life carries risk – even mundane activities like eating, drinking, driving your car…

There are different levels of risk no matter how you use your money. Even when you put your money into a bank account there is risk. There is a risk that the bank will go bust and that you might never see your money again.

Is forex trading risky?
Is forex trading risky? © forexop

Trading is different from gambling. You do not need to be a gambler to trade in the foreign exchange markets.

When you buy or sell a financial asset such as a currency, you do so according to your analysis. You hope to get a positive return over time, in addition to your starting capital.

When you gamble, you are rolling the dice and crossing your fingers.

#2 Forex trading is only for the rich

At one time trading currencies was just for affluent people. Nowadays anyone can trade the forex markets with just a few dollars.

Even if you set aside just $50 each month, you will have $600 at the end of the year you could use in your trading account.

If you have the knowledge, you can also increase your exposure to the markets through margin trading. With margin trading you control a larger position with a smaller amount of capital.

This style of trading can increase returns when you have a small amount to start with. However it is more risky.

#3 Professional traders are always smarter

Many studies over the years have shown that professional traders, analysts and fund managers cannot continually beat the markets.

Moreover, these “professionals” are human beings. Like everyone else, they make mistakes and sometimes let themselves be overcome by their emotions.

#4 When something has fallen in price, it will bounce back

It’s true that sometimes a currency or a stock will fall sharply in value. Then it will rebound equally strongly.

However you should wonder what was the reason that it fell so suddenly in the first place.

Scratch a little bit underneath the surface and you might discover why. A currency might fall because the country’s economy is slowing and interest rates will be cut. Likewise a company may have been involved in scandals such as fraud or false accounting which has caused its stock price to fall.

Speculation on assets that have depreciated significantly is risky and complex. It requires a certain amount of know-how.

#5 Trading in foreign markets is far too risky

Exposure to international markets can reduce the overall risk of your account.

According to data gathered by Fidelity, a portfolio with a 70:30 mix of domestic and foreign assets is less risky and more profitable than a portfolio of domestic securities alone.

Most investors are underexposed to international markets. This isn’t an optimal diversification of risks. Too often, American investors believe that investing in US multinationals allows for an adequate international diversification of their money.

However the evidence suggests this is a myth.

#6 More trading equals better performance

More trading or holding more positions in your account will not necessarily lead to better performance. Unless the extra positions are for hedging, the opposite is likely.

Fees, taxes, penalties and commissions will impact your final performance. Not to mention the extra time and stress of managing “an overly active account”.

Sometimes currencies and other assets act as a natural hedge against each other. When one moves down in value, the other moves up and vice versa.

But hedging your trading portfolio needs skill and active management. Otherwise in times of uncertainty an overloaded account will be at greater risk.

#7 Assets you “know” must be a good investment

Trading in an asset because you think you “know it” is not the most logical choice. For example, many new forex traders will only trade their home currency. Or occasionally the one of a country they’ve visited.

There’s nothing wrong with trading an asset that you know very well and where you understand the underlying economics. In reality this is how most professional traders and fund managers work.

However trading from an emotional bias, simply because you feel attached to the asset will limit your potential for profits and diversification of risk.

Finally…

Remember that “past performance is not a guide to future performance”. Asset prices will change for many reasons. Not all of them can be predicted.

There are many other facts and myths about trading in forex. What other misconceptions do you know? Share them by leaving a comment.

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1 Comment
  1. Great information. Thanks for sharing this valuable article with us. It is a must read for all who want to step in trading.

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