Top Misconceptions of Forex Trading
1. Currency trading is so easy a trained money could do it?
Well is that your believe you’ll awake to a sad realization my friend. 95% of all newbies lost their money on a period of 3-6 months. Why? because trading is simple but not easy and most trading don’t really know what their doing.
2. Forex market is too big, only big banks and institutions can make any money.
Investment banks, money center banks and hedge funds continue to reap significant profits from currency market speculation. In some cases it is 50% or more of their holdings. Retail investors and professional traders have traditionally either been locked out of the inter-bank market entirely or hesitant to incorporate Forex into their trading portfolios. However, the past five years have seen a dramatic increase of individual investors participating in the USD$3 trillion per day market *.
The banks are heavy traders in the Forex market, but don’t be intimidated by the big players. The Forex market is a level playing field and you have the ability, under the right conditions, to out trade the banks. That is largely how every major Forex trading fortune has been made. Now days most Forex online brokers allow their retail clients to participate in the otherwise institutional world of Forex by making a market specifically for retail traders. By making a market specifically for its clients, brokers are able to offer tradeable mini-lots of as small as 1,000 units of a given base currency. Combined with up to 400:1 leverage available on many currency pairs, individual traders maximized exposure to the movement of currency prices.
Leverage is not all about gains of course, it’s been said its a double edge sword for good reason, increased upside exposure also means increased exposure to potential loss and despite all the over-hyped promotions found online and in printed advertisement Forex is a high risk/return market.
* The surge of retail Forex trading is underlined by the fact that daily trading volume typically exceeds $50 billion per day among retail investors. At the rate at which it has been growing, it will not be long before forex volume surpasses turnover on the New York Stock Exchange, which averages just over $60 Billion daily. CNN Money Mar 16, 06.
3. It will take me a lifetime to understand the intricate political and economic climates of every country whose currency I can trade. Where do I even start?
The Forex market can be traded in any number of ways. While it is certainly advised that a trader have a basic understanding of what moves particular currency prices, many traders rely heavily on purely technical indicators to trade the market. A good place to start is with daily Forex specific macroeconomic commentary that will give you an overall view of the currency market. From there, you may wish to concentrate on one currency or even one currency pair or you may concentrate on a specific type of news release regardless of country of origin. There are four (4) specific currency pairs that due to their inherent trading volume dominate the Forex market arena providing the best trading opportunities, these currency pairs are: GBPUSD (British Pound vs US dollar) – simply called Pound or cable
EURUSD (Eurodollar vs US Dollar) – simply called Euro
USDCHF (US Dollar vs Swiss Franc) – simply called Swiss Franc or swissy
USDYEN (Japanese Yen) — simply called Yen
4. Trading in the 24-hours spot FX market is risky, especially in an unregulated market.
The Forex market is not inherently more risky than other tradable products. In fact, as I have shown above, the Forex currencies market is incredibly liquid. However, as a retail trader of a market maker (aka broker), you will be utilizing leverage. It is leverage, and not the market itself, that increases your financial risk.
While leverage up to and including 400:1 allows you to gain exposure to price movements with relatively little collateral exposure, both gains and losses will be magnified. For this reason, I strongly encourages you to stick available risk management tool in the Kendo FX trading manual and to seriously consider your risk tolerance before you trade with real money.
The OTC Spot FX market is regulated by the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC) in the United States. The broker, manager or introducing broker (IB) you chose to conduct business with should be a registered member of the NFA. You can find out more about the NFA and how it strives to protect investors at http://www.nfa.futures.org/compliance/forex.asp
5. Internet trading is risky. What happens if my computer crashes?
You must choose a broker that provide several means to trading; deskstop or online platform (or both) and a 24-hour dealing desk accessible by phone with which you can place trades. That way you will be protecting yourself against unforeseen events that might interrupt your trading activities.
