Myths of Forex Trading

Veterans in the forex market know a thing or two about the myths surrounding the foreign exchange market.

The misconceptions can be the biggest hindrance in your road to success as they can drive you away from reality and give you a false perception of the marketplace. Below are some of the common myths about forex trading in India that you should be aware of in order to protect your financial interest:

Myth No. 1: You can make easy money with forex trading

No, never. In fact, trading in any kind of asset class is far from easy, with each requiring its own set of skills and techniques.

In forex trading, what’s easy is opening a trading account and starting to trade. But making consistent profits is a different ball game because the currency market is considered far more volatile than stocks, bonds or commodities markets.

You need to devise a trading strategy, test it and stick to it in order to keep your success rate high and make money in forex trading.

Myth No. 2: High leverage is good

Most foreign exchange brokers in India market themselves by talking about the high leverage they offer to traders. This creates an impression that leverage is always good and can make traders rich quickly. However, in reality, leverage is quite a risky tool that can multiply both your gains as well as losses.

High leverage can help in boosting profits, but can also erode all your trading capital and push you towards bankruptcy if you are caught on the wrong foot. So, never run behind leverage blindly. Assess the kind of risk you want to take and then manage the leverage on your trades wisely.

Myth No. 3: Forex is for short-term traders

That’s one of the most common misconceptions about currency trading. It is widely believed that forex trade is only effective if you take short-term positions, with long-term investors being better off looking at other asset classes. But that’s far from the truth.

You can work around successful long-term forex trading strategies as well for a currency pair by analysing geopolitical links, current macroeconomic situation, interest rates in both countries, etc. A right long-term call taken after due research can make much more profit than many short-term calls put together. And it will also keep your stress levels under check as you would not be involved in minute-to-minute trading.

Myth No. 4: You need a lot of money for forex trading

This may be called the truth of the past when online forex trading was not available. In those days, the interbank forex market was accessed by large financial institutions, central banks, companies and high net-worth individuals only.

But online forex trading opened the gate for small retail investors, with brokers providing them easy access to forex exchange along with the option of high leverage. Today, anyone with a basic internet connection and just a small amount of money in his/her bank account can start trading in the currency market without any restrictions.

Myth No.5: You will make money in forex if you are a successful stock market trader

Absolutely false. Stock markets and currency markets are completely different. The way to approach both the markets are different, with each requiring its own set of skills. Prices of both the asset classes are driven by different kinds of factors. Trading hours and duration are not the same. Volatility and liquidity levels vary. This translates into the fact that most stock market veterans fail miserably when they take up forex trading and apply their standard strategies there. So, if you already trade in stocks or commodities and want to try forex trade as well, don’t make the mistake of treating currencies as other asset classes.

Some of the biggest strengths of a smart investor are correct information, hard work and dedication. Don’t let popular myths about forex trading cloud your judgement. Research well instead of listening to what others are saying and take a well-informed decision.

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.