First of all let me wish
you a very happy and prosperous new year. With winter mist around the
corner I decided to write an article on Demystifying the Myths spread around Forex
The retail market is full of unskilled traders who are
pretty new or have few months or a year experience. As most of these traders
win few times and lose most other times, they tend to get nervous and start
spreading negatives about the market so that new traders don’t enter the market. It is not only the individuals who spread the myth but also a lot of
brokers spread a few words which are beneficial for them.
Here are some of the misconceptions about Forex I have hear and have tried to explain the reality.
- Forex is a Scam
It is one of the biggest myths
spread around the world. Since Forex transactions are not controlled by any
centralized place unlike stock exchange it has been widely in circulation. How
ever, there are certain individuals and companies involved in such scams may be
about 2%. A trader should always know the history of the company and the membership with the regulatory. Stronger the regulator, lesser the chances of the scams
and cheating to the investor.
- There is no reality in Forex
Because the trading involves few
clicks of your mouse unlike other business where much physical involvement is
required, people consider it as a game and not reality. What one should
understand is that the even though trading is done with few clicks; the work of
an analyst/trader is more stressful than other works.
- Forex brokers trade against you
This is another misconception circulation
about the brokers. Forex brokers especially market makers, stand guarantee to
your trade. If a trader wants to buy a specific currency there got to be
someone who should be ready to sell. Taking this case, the market makers stand guarantee
to the trade and they will write in their books. If the trader makes money in
the trade, market maker pays the money to the trader and if he loses that
trade, it is the profit for the broker. Brokers know that majority of the
traders lose money and they take advantage of trades.
- Forex is only for day traders
Just like any financial market, Forex
gives a lot of opportunity to both the positional or swing traders as well as
intraday traders. Many brokers spread this story as it will generate a steady
income for those brokers but may not be the same for the traders. In fact the
chances of losing more in day trading as it is not possible to keep the odds in
one’s favor in a long term.
- Forex is a 24 hour market and can be traded at any time
Just because the market opens all through the day, there is
no guarantee that the market will give a trader very good opportunity to trade
at when ever a person wants. A trader should know when the bigger players are
active in the market and trade with them which will give good returns. To learn
the best timing visit my previous article
- No commission paid in forex
Most of the brokers earn their
money through the spread. I.e., The difference between buy and sell. In this
case the trader has already paid commission before closing the trade. However,
broker like Dukascopy who act as market place instead of market maker are the
real brokers who just bring the actual buyers and sellers together, charge
- Forex needs high investment
Till recently only Institutions and hedge funds were allowed
to trade the Forex market and individuals had to approach the market makers to
trade Forex. But changes in the technology now allow an individual to trade the
market directly. Few years back only those who had deep pocket of $100000 were
allowed to trade in Dukascopy but now thanks to technological changes even a
student above 18 years can trade with his pocket money of $100.
- Forex is gambling
Gambling is a probability of winning or losing money which is
mostly decided by chance. There is no logic behind the outcome of the decider and mostly luck plays major role.
While trading is an art where the currency moves up or down depends on demand, supply various external factors relating to currency pairs and taking the proper action at the right time gives one a chance to
- By diversifying portfolio you can make money
Market is an ever changing environment. There is no fixed
formula to win always. So, whether a trader aims on one pair or more, it only
depends on how much correct he is. The assumption behind this is, if a trader losing in one pair he may recover loss in the other. However, small investors have the chance of receiving margin cuts as the leverage tends to be more on multiple positions.
- Automated trading is highly profitable
It is assumed that the history repeats itself and most of
the actions taken by automated trading are based on the above assumption. Hence
it will be profitable or loss making are more chance. Automated trading may be
profitable but not highly.
- Low Risk/Reward ratio is the best way to make money
It’s always been a lie in the market. It’s a gambling
attitude. Many people advocate a take profit/stop loss ratio of at least 2:1 or
3:1 means for every $200 or $300 you make per trade, your potential loss should
be capped at $100. Most people would agree with this recommendation. After all,
shouldn't any potential loss be kept as small as possible and any potential profit be
as large as possible? The answer is, not always. In fact, this common piece of
advice can be misleading, and can cause harm to your trading account.
- There are stop loss hunters in Forex
Forex market is the biggest financial market in the world
with over 3 trillion turn over every day. With that, there is no one who can
corner the market and trigger one’s stop loss. A retailer may have 10 or 50
lots maximum per trade but it will not even equal to a penny compared with the
huge turnover of the market. Due to the fact the market is volatile, most of
the traders who place tighter stop losses lose out and cry foul on these
Here I have tried to list as many misconceptions which are
circulating around us as possible. If you have come across any other myths and know the reality of the myth, please share it through commenting which will help
everyone who read the article and also to me as I will also learn from it.