Despite the fact that there are currently more than 9.6 million forex traders in the world, the topic of forex trading still manages to bring up many myths and misconceptions. Knowing the truth about some of the most common misconceptions out there can really save you money in the long run if you’re a trader. On the other hand, those that have only considered trading may have chosen not to open a trading account over a simple rumor, while others may jump in with unrealistic expectations. If you want to learn the truth about forex trading, keep reading as we break down the 7 most common misunderstandings about forex trading.
Misunderstanding #1: Forex is a quick way to get rich.
We can thank several movies, brokers, and sketchy “motivational” forex traders for the misunderstanding that forex trading can make you rich overnight. Oftentimes, people see flashy advertisements that show traders living a luxurious lifestyle and they decide they want that for themselves. In reality, these are just advertising gimmicks meant to capture your attention and draw you in so that the trader can sell you something or to convince you to open an account with a broker. On the bright side, you really can make a lot of money trading forex, but the amount depends on experience, the amount you invest, the market environment, and other factors. If you start trading with a few hundred dollars in your account and little knowledge of the market, it will take a while for you to reach the larger monetary goals you’ve set.
Misunderstanding #2: Trading is a scam.
While some traders believe forex is a way to get rich quick, others think that the system is rigged and don’t believe you can really make money doing it. Shady unregulated brokers contribute a lot to this misunderstanding, but you also might hear from scorned traders that lost money due to their own error. Those traders then turn around and blame their broker, the market, or something else to help ease their bruised ego, when they probably just weren’t prepared to open their first trading account. As long as you choose a trustworthy broker that is regulated with positive client feedback, you shouldn’t have to worry about any issues. It’s also important to know that there are too many factors affecting the forex market and things move too quickly for there to be any way for your broker to rig the market.
Misunderstanding #3: More complex strategies are better.
Many traders believe that the more complicated a trading strategy is, the better the results will be. It’s actually fine to stick with a simpler strategy, you just need to take certain matters into account, like price movement, a ranging or trending market, reversal points, and so on. If your trading system is making profits but it isn’t as much as you’d like, start by considering these factors before adding more variables and overcomplicating things. Know that even the best traders usually walk away with only a slightly higher win rate than their loss rate, so you shouldn’t throw an entire trading strategy out the window just because you feel you should be making profits more quickly.
Misunderstanding #4: More trades = more profits.
This is a common belief among forex traders because it makes sense that the more trades you enter, the more chances you would have to make money. The truth is that you can actually make the mistake of overtrading if you do this and you put yourself at more risk of losing money. If you open too many positions at once, you also may have trouble keeping up with everything and you could become overwhelmed, causing you to forget to exit positions and to make more careless decisions. Instead, you should only enter a trade if there is good supporting evidence to do so and be sure that you never open more trades than you can manage. Even if you’re left feeling unproductive, it’s better to avoid trading if there just aren’t any good opportunities in a day.
Misunderstanding #5: It’s possible to have a 100%-win record.
If you ever hear a trader say that they’ve never lost money or made a mistake while trading, don’t believe them. With the forex market being so volatile, it just isn’t possible to make the right moves every single time, even if you’re an expert trader with a high win rate. It’s also impossible for signal providers or Expert Advisors to trade with 100% accuracy as well, so don’t fall for these false claims. When you do lose, you shouldn’t beat yourself up over it, as the solution is to keep calm and assess what went wrong. If there’s a problem with your strategy or you made a mistake, simply try to learn from it, make any needed changes, and move on.
Misunderstanding #6: Trading with high leverage provides greater rewards.
There’s an old saying about forex trading that claims, “leverage is a double-edged sword”. This is absolutely true – the higher the leverage you use, the greater the potential for returns; however, it also increases your risk significantly. Many beginners rush out and decide to trade with the highest leverage available through their broker, which can be as high as 1:400, 1:500, or even 1:1000 in some cases. Beginners need to know that many professionals actually prefer the leverage ratio of 1:100 because it provides a good opportunity for investment without an insane financial risk. You’re still free to make your own decisions regarding leverage, just keep these facts in mind if you’re tempted to use a high degree of leverage.
Misunderstanding #7: It’s best to choose a broker that offers 100% bonuses.
Some brokers offer perks in the form of bonuses and promotions to traders that choose to sign up for an account with them. While it’s great to see deposit bonuses and other ways for traders to make extra money, it’s important that you don’t choose a broker solely because they offer this type of deal. There are usually strings attached when it comes to this, like minimum trade requirements before you can withdraw profits, the bonus being nullified if you make a withdrawal before fulfilling certain conditions, and so on. The broker might also offer bad trading conditions in general and use the bonus to draw in traders quickly and to keep you from looking into their terms further. This doesn’t mean that promotional opportunities can’t be a good thing, just that you need to do thorough research anytime this is offered.