Seven Forex Myths for Beginners: the Truth About FX

According to the most recent figures of The Bank for International Settlements the daily Forex volume is 5,5 US Dollars Trillions and it is not one of the forex myths. One trillion is equal to a 1000 billions. Just imagine – for this amount you can buy three New-Yorks or five Parises.

forex tornover

When a novice turns into a trader, he becomes a part of this world. Closed deals bring a profit, but at the same time they bring losses to a trader. Not every trade will be profitable and not every time the trend moves exactly as a trader wants it to move.

But as soon as you start to trade like a pro, trading on Forex becomes a dream job. Thailand beach, a little cafe in Rome, or Swiss ski resort can be your new office.

There are a number of obstacles on the way of a beginning trader. The very first is to find out how the market works. Trading is enmeshed in a web of misconceptions and forex myths. These misconceptions are born from ignorance; they are results of someone’s mistake; or they are pure fiction.

Let’s try to deal with misconceptions that are waiting for a trader at the beginning of his career. There are seven myths for beginners in foreign exchange market: one for each day of the week.

Forex: scam or real

monday
Monday: “Forex is a scam, a pyramid scheme, a type of gambling”

It is unbelievably tenacious representative of forex myths, that just won’t die. Each novice in Forex is going to face it. You will hear that trading on Forex is the same thing as playing casino games. That Forex is a roulette game, a choice between red or black. That the foreign exchange market is similar to a poker party, in which someone wins millions and someone loses his last dollar.

In reality, the foreign exchange market is far from gambling. The details may seem similar but the basic idea is completely different. It is a market, the same as car market, property market or food market.

The negative connotations have arisen because of many scammers that flooded the market. It is not surprising – a major source of funds always attracts a lot of scammers.

This forex myths can be a serious obstacle for those who just learned about Forex. It is hard to take a first step and enter the market when the Internet is full of statements like: “Forex: scam or not” or “Forex is a pyramid scheme and a trader who entered it first, skims the cream from it”.

Forex myths - forex is a piramid

Let us try to figure it out: what advantage has a trader from Singapore over a trader from Australia, who entered the market a month later? How can a trader from Singapore earn more just because he was first? It is a total misconception. To make a comparison between Forex and a pyramid scheme is a fundamental mistake, because basically Forex is a market. You can call a pyramid scheme your nearest store or a website where you usually book air tickets as well.

Forex is not pyramid

Illiterate statements like that give a person false representation and can dissuade him from Forex forever. At the same time, one should not forget that trading on the foreign exchange market is a risky financial speculation.

Tip:
Trading requires training and experience. It is not a good idea to think that buying and selling of currencies is the same thing as shopping.

Forex Jobs

tuesday
Tuesday: “Either Forex or job”

So you’ve decided to go ahead. You have considered all the pros and cons and now you are planning your schedule. It brings up the question: how to find time to trade? Well, it is an ideal scenario if you have enough money and flexible working to devote as much time as possible to trading. But what about those who have 9 to 5 working day? And you still need time for yourself, for your family and friends, not to mention necessary practicing your trader’s skills.

This is another popular forex myths: a trader must sit near a computer screen for days on end.

forex rtading around the clock

Partly this forex myths appeared because of short-term trading which required maximum attention and concentration from a trader. But these deals usually do not last more than 10 minutes. While long-term trading you do not need to sit near a computer all the time, moreover, it may lead to losses. Here is some food for thought: on one of the most popular Forex forums seasoned traders shared their experiences: 90% of them combine work and trading.

Forex trading 24 hours

Since a trader is not obliged to sit in the office, you can work from anywhere, even you travel around the world. There is no guarantee that if you spend 24 hours monitoring the market, your trading will be profitable.

TIP:
If you do not like short-term trading, try long-term one. Do not use scalping strategy if you lack experience in trading. Maximize you accessibility to the market: install a trading platform on your phone or tablet.

Forex Broker License

wednesday
Wednesday: “Any broker wants to deceive a client, even if he has a license”

Quite odd misconception, because brokers are businessmen in the first place. Why should they deceive their clients? The benefits of it are small and consequences are serious and unpleasant.

Choosing a broker is the first important step. It is impossible to trade profitably without a normal broker. Almost every country has special organizations which regulating financial markets and brokers in particular. These organizations are supported by the government.

List of organizations by countries (a partial list):

Belize
International Financial Services Commission (IFSC)
China
China Securities Regulatory Commission (CSRC)
Hong Kong Securities and Futures Commission (SFC)
IndiaSecurities and Exchange Board of India (SEBI)
IndonesiaCommodity Futures Trade Regulatory Agency (CoFTRA)
LatviaThe Financial and Capital Market Commission (FKTK)
MalaysiaSecurities Commission (SC)
RussiaNational Association Of Securities Market Participants (NAUFOR)
SwitzerlandFinancial Market Supervisory Authority (FINMA)
The UK Financial Conduct Authority (FCA)
The USCommodities and Futures Trading Commission (CFTC)
Financial Industry Regulatory Authority (FINRA)
National Futures Association (NFA)

If any problem arise, a client has a right to address these organizations. All these organizations can be divided by a degree of “rigidity”. A top position is occupied by US organizations (CFTC, NFA and others) – they are very strict. Great Britain (FCA) and Australia (ASIC) have lower requirements concerning initial capital required, but higher requirements relating to reporting. However, a broker needs $35,000-$50,000 to obtain a license.

Cyprus (CySec), Belize (IFSC) and New Zealand (FSP) guarantee a certain level of protection for Forex traders. To obtain a license, a company needs to prove that it has $20 million of free capital (without clients’ deposits). Traders prefer to work with brokers who are registered in EU countries – usually it is a positive indication that company has been working in a financial market for a long period of time.

For instance, beginner-brokers who want to work with clients from European and post-Soviet countries, choose registration in Latvia.

One of the most problem area in the foreign exchange market is a lot of scam brokers, who are operating from countries where regulation is poor or from those countries where there is no regulation at all. Your task is to choose a company with a license in a country which has functioning organization.

In spite of the volume of trades in the foreign exchange market, now it stays unregulated: there is no international organization to watch the trading in the Interbank.

TIP:
A broker should not have an expired license. Check it carefully.

Forex myths about Demo

thursday
Thursday: “Trading on a demo account is obligatory”

Let’s assume that you have already chosen a trusted broker. The next step is trading on a demo account. There are different opinions about trading on demo account. Some traders recommend it as a part of usual practice. Others are against it: while trading on a demo account, a trader does not feel responsibility for the money and then he can extend his obtained carelessness to a real account with real funds.

myth forex demoaccount

Theoretical knowledge will help you to understand how Forex works, but practice will help you to improve your skills greatly. Forget about thick volumes on economic theory; practice – that’s what you need.

It is important to find a golden mean: start with a demo account, practise to open and close deals, watch the indicators.

TIP:
The point is not to linger on a demo account for a long time. Once you feel that you are ready to work on a trading account, start trading and get a real profit.

Currency Pairs

friday
Friday: “You need to focus on one or two currency pairs while trading on Forex”

There are following types of currency pairs:

  • Major Currency Pairs – the most traded pairs of currencies. They include USD.
    Example: EUR/USD
  • Minor Currency Pairs (another name – Cross-Currency Pairs) are less popular than Major Currency Pair, nevertheless are widely traded. They do not include USD.
    Example: EUR/GBP
  • Exotic Currency Pairs – include USD, paired with the currency of some developing country.
    Example: USD/SGD

The popular myth insists on the fact that trader needs to focus on one or two Major Currency Pairs. Although, it’s not obligatory. Pairs with the most negative correlation (strong currency against weak currency) give a chance to catch clean and strong moves.

Choosing currency pairs for trading

The example of it is the strategy called “triangular arbitrage”. Trader converts one currency to another, then converts it to a third currency and, lastly, converts it back to the first currency. It all happens very fast and usually lasts several seconds.

Traders use advanced software to detect it and to automate the whole process.

To sum up: for many traders exotic currencies are “terra incognita”. Relatively low liquidity and sometimes high spreads stop traders from working with exotic pairs.

TIP:
No matter what currency pair you trade, check out the latest news. If you are trading USD/JPY – you need to keep up to date with economic news from the US and Japan, for example, the S&P 500 and the Nikkei 225 indices.

Forex myths about Forex Strategies

Saturday: “You should not change your strategy even if it does not bring you a profit”

Frequent change of strategies often called the cause of failure of beginning traders. Practically, a trader tests a system long enough to consider it profitable or not. However, if a method is ineffective, it is simply ridiculous to continue using it. An experienced trader should try different systems till he finds the one which matches trader’s style and his personality.

A golden rule: trading seems complicated to those who make it difficult.

Overload trading platform

Beginners like to overload a platform with dozens of indicators, which do not correlate with each other, sometimes contradict and even put your capital in jeopardy. If you have a strategy, make sure that it is simple enough to explain it to a child. A strong system suits you perfectly and does not create any kind of problems.

Use a combination of several systems simultaneously. No one knows which of them will help you to make a profit.

TIP:
Any strategy, approach or concept is considered ineffective, until proven otherwise.

Short-term trading

sunday
Sunday: “Forex is suitable only for short-term trading”

For an unknown reason, many traders try to avoid long-term trading. Beginners are also afraid of it, believing that long-term trading brings profit slower than short-term trading.

short and long trading period

As a matter of fact, long-term trading has its own benefits: it is more profitable and less risky than short-term trading. You need to remember that in most cases price tends to follow the major trend. This rule can be applied to any type of financial market, not only to Forex. One of the axioms of beginning traders is: “Do not trade against the trend”. Price usually moves in one direction for a long period of time, so when you identify the Forex trend, you start to get real money.

TIP:
Short-term price movements do not bear serious consequences and, as a rule, do not bring you a great income. Of course, a trend reversal is possible, but you need to watch the market carefully and be able to notice a first signs of it. The coming reversal can be identified with help of indicators, such as candlesticks.

Over time, you will surely write your own list of myths and misconceptions about Forex. It might be an advice from a professional trader that turned out to be a complete nonsense. It might be a very expensive Forex advisor which does not work properly. It might be a strategy which does not bring a profit. When you become an experienced trader, you will learn how to recognize these myths and how not to fall easy prey for them.