10 myths about Forex
The population's attitude towards one or another currency tool is defined by its financial competence. Forex, which first appeared in Russia in 1995 and became easily available to mass audience in the early 2000's with an extensive spread of the Internet, accumulated its own myths that none of other markets can boast. Market participants themselves contributed greatly to creating those myths: both professional dealing centres and unsuccessful traders. Before we start talking about the myths in detail, let's examine the factors that give rise to them.
Reasons for myths
The history of the Russian Forex market abounds in scum schemes when dealing centres disappeared with clients' funds, allowed considerable slippages and requotes at most important moments, increased spreads and prevented traders from withdrawing funds from their accounts. Russian dealing centres had freely practised those schemes till huge foreign operators joined the over-the-counter currency market and introduced new rules for traders' benefit.
It took 10 years for the Russian Forex market to introduce legislative market regulation. Since 1st January 2016, a trader may feel protected and forget about the problems that existed in the early 2000's.
However, the bigger competitiveness forced small firms to undertake another improper step: the promotional background they create convinces prospective clients that Forex earnings can be easy and huge even for those who only have 10 USD. This approach gave rise to mass demand for Forex services in 2005-2010 and resulted in many beginner traders having little knowledge and being almost unprepared for real trading. Most of them gradually lost their deposits and started spreading the belief that Forex is mere gambling where rates can only be guessed, not predicted. Unsuccessful traders also gave birth to a myth that earning from Forex is impossible.
The paradox of Forex myths consists in the fact that they often contradict one another: Forex traders lose all their money vs. Forex traders become rich extremely fast; trading is extremely easy vs. only smart ones can understand the basics and succeed, and so on. Let's examine each of those myths separately.
Myth №1: Trading at Forex is extremely easy and does not require any knowledge
In fact, this myth is even more insidious since almost every one can cope with a trading process at the currency market, with free time, wish and secondary education (at least) at hand. At the same time, it's absolutely wrong to assume that short-term training will be enough for making stable profits. A way to becoming an experienced and successful broker passes through thorns and mistakes and implies a serious study, self-improvement and self-control. Dishonest brokers often hush it up, urging traders to make huge deposits and to start trading actively.
Myth №2: Forex yields huge profits
This myth is rooted in huge leverages available at Forex that can sometimes go up to 1 to 500. A right forecast can thus help a trader increase his/her capital fourfold in just one trade. However, real trading can also have an opposite effect:
- a bad forecast will ruin the account immediately;
- according to money management rules, a risk per trade shouldn't be more than 2% of one's own equity, which is very hard to put in practice with big leverage at hand;
- big leverage demands huge capitals to work in the market for a long time without triggering Stop Out and Margin Call.
Experienced traders ignore profitability rates of over 100% or at least treat them with caution. Stable average profits month after month are much more important.
Myth №3: 10 USD are enough to start trading
Today most brokers offer clients cent accounts with a minimum deposit of 10 USD approximately. These accounts are normally meant for practising trades and testing trading systems. Even with annual profitability of 100%, a trader may not count on more than an annual income of 10 USD. An income of 10,240 USD may become real only in 10 years, if profitability remains the same. In real life, however, it's hardly possible to sustain such profitability for a period of 10 years. So, it would be wiser to reframe the myth in the following way: "At Forex you can become rich even with 10 USD, but you'll have to work hard for over 10 years".
Myth №4: Most traders lose their money
Among traders there's quite an ironic classification of traders as sheep, pigs and chicks.
Ninety percent of beginner traders classify into one of those categories:
- sheep are beginners that trade randomly without respecting rules, are easily overwhelmed by emotions and ruin their accounts fast;
- pigs are greedy traders that run after huge profits, ignore money management rules and refuse to place limit orders;
- traders-chicks are so frightened that they don't open trades until all signals have pointed to a trend reversal or continuation.
When chicks finally make up their mind to open a trade, it's often too late. Ironically, in such a case chicks are afraid of fixing losses and lose their money while waiting for the market to roll back where it used to be.
These are the categories of traders that lose their money at Forex. If a trader acts wisely, he/she will barely lose money.
Myth №5: Traders' transactions are not sent to the real market
Today STP brokers provide a unique order execution technology, being a mere technological intermediary that sends clients' orders directly to liquidity providers from the over-the-counter currency market. The myth originates from an outdated dishonest technology of "currency kitchens" that was long used by Russian brokers.
Myth №6: All foreign brokers are unreliable a priori
This is perhaps the most powerful Forex myth that is still absolutely groundless. Indeed, foreign brokers are not subject to Russian legislation, which, actually, hasn't existed as such until lately. At the same time, they provide services according to rules of principal foreign platforms and obey European and US regulators whose regulations are much stricter than Russian ones. The only drawback is that a trader will need to deal with a foreign court in case a conflict situation arises. For example, a situation when a Russian broker opens an office on an offshore territory with the aim of avoiding taxes or providing bad-quality service is quite sad.
Myth №7: Forex trading robots are a perfect way to earn without much effort
Trading robots are one of the tricks used to entice beginners into the market. They say, it's enough to buy and launch a trading robot, and money will flow like water. There's no practical data to confirm this theory. Still, there exist some powerful and more useful tools of passive trading, for example, LiteForex Social Trading. Social trading allows you to pick professional traders and copy their signals, at the same time controlling your account fully.
Myth №8: The more a trader trades, the higher the income is
When beginner traders think of professional ones, many of them conjure up a busy person glued to his/her computer, opening and closing orders every single minute. The number of orders gradually becomes so big that a traders needs to optimize his/her work, and then trading robots appear.
In practice, a professional trader oftentimes simply analyses the market, searching for a signal or leaving this task to a trading robot. His/her free time is usually devoted to self-education, strategy optimization, or unrelated matters.
Myth №9: Experienced traders' success is hidden in a unique indicator (secret, skill, knowledge)
Ironically, most traders succeed thanks to these three obvious components:
- their own trading system
- competent money management
Novices can read about this secret of a successful trader in any book on trading. There are practically no other secrets of success. Also, we should notice that a secret is sometimes considered to be a complicated trading system abounding in indicators. This assumption is absolutely wrong as a good trading system implies no more than 3 indicators based on a simple idea.
Myth №10: One needs to be smart to trade in the currency market
As we've mentioned it before, one rather has to be diligent and prepared for a long training. An initial level of education is rarely important. A Candidate or Doctor of Economics can easily lose money in the currency market if he/she succumbs to emotions.