For many decades, access to the forex market was limited to the extremely wealthy or those well connected to financial circles. This changed in the 1990s, when the rise of the internet meant retail forex was accessible to millions of people - but despite this increasing access to the forex market, many forex myths still persist:
- Is forex trading legit?
- Is forex trading gambling?
- Is forex trading legal?
- Is forex trading profitable?
- Can you make money trading forex?
- Can I become a millionaire trading forex?
Here are a few of these myths and misconceptions debunked...
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Myth #1: Is forex trading legit?
Yes, forex trading is legit. Some people dismiss forex trading as a scam, but this is usually due to a lack of knowledge about what forex actually is. In reality, the forex market is the largest trading market in the world - and it has the ability to greatly affect the lives of billions of people around the world: traders, their families, and the global financial markets. In other words, forex trading is as legit as it gets.
Myth #2: Is forex trading gambling?
Forex trading is not gambling. Good traders will calculate their risk on each trade carefully, and do not gamble their money on the market but undertake vital technical and fundamental analysis before entering a trade.
Myth #3: Is forex trading legal?
Yes, forex trading is completely legal - but it’s important to watch out for scams. Forex - like any other endeavour where money is involved, from stocks to crypto - can be fertile ground for scammers. The best advice is to be wary of potential fraudulent activity, be careful of where you invest your capital, and make sure any broker you work with is FCA regulated.
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Myth #4: Is forex trading profitable? Can you make money trading forex?
Yes, you can make money trading forex, and forex trading is profitable. But, as with all trading, it depends on your strategy, your risk management, and your mindset.
Forex trading is profitable without having a huge sum of money in your account - you can even open an account with as little as $1 with some brokers. That does not mean that’s necessarily advisable, but it is certainly possible. The only requirements for trading forex these days are a reliable internet connection and a few dollars.
While it is refreshing that an account can be opened with so little money, bear in mind that an underfunded forex account is hard to trade profitably. Advice varies on exactly how much you really "should have" to trade forex sensibly. The suggested amount typically starts at around $5,000. An account of this size will allow you to make large enough trades to make a reasonable profit, while also being able to weather the inevitable losses that are part of forex trading.
So, in short: you can make money trading forex, but you’ll need money to invest.
Myth #5: Can I become a millionaire trading forex?
“Can I become a millionaire trading forex?” is one of the most commonly asked questions in the forex world - and the answer is you can be, but it’s statistically unlikely.
The massive expansion of retail forex into the mainstream consciousness, often through marketing offering training and other products, has created a misconception that forex is an easy way to make your fortune - and that trading forex is a sure-fire way to become a millionaire. These carefully crafted advertisements create visions of expensive cars and luxury vacations in the heads of potential forex traders.
The reality is that successful forex trading requires patience, a lot of time spent learning, and a strong psychological mindset. Is it possible to walk into a casino and plop $10,000 down on a bet and walk away a millionaire? Yes, but the odds are astronomical. Don’t fall victim to pie-in-the-sky wishes. Build a solid trading career with practice and learning, exercising patience and building experience.
Myth #6: The forex market is rigged
No, the forex market is not rigged - but there are some key things to watch out for.
It’s not uncommon to find reviews of forex brokers online where the reviewer blames the broker for their failures. “They hunted my stops,” one might say. Others resort to labeling the broker with the dreaded label of “bucket shop.” How can so many reviewers be so vehement about these events if they didn’t happen?
There are forex brokers whose entire business depends on you failing. These market makers are the counterparty of all your trades. So, when you buy a currency pair, they are on the selling end of the transaction. And when you sell the pair, they are on the buying end. This presents a conflict of interest that is hard to ignore. Within the constraints of the platform, they will also be the one closing your position. So, they have a vested interest in how and at what price your position is closed.
The best way to avoid this type of broker is to choose STP or ECN brokers. STP (straight-through processing) and ECN (electronic communications network) brokers have connections to the larger InterBank system that makes up the forex market. These brokers route your order out to the larger forex market, where someone else fills your order. These brokers make their profit from spreads and commissions.
The forex market is so large that, when operated in this way, there is very little awareness or concern about what your position is or at what price it ends up. Since the broker makes their money either way and they are not on the opposite end of the transaction, their focus is strictly on providing competitive fees and optimum execution to their clients.
Myth #7: Good traders are right every time
No, good traders are not right every time. Successful forex trading is not about getting it right every time. It’s about getting it right slightly more than you get it wrong - this is where your profits lie.
And actually, that is only in terms of pips. You can be wrong on more trades than you are right, but as long as your reward-to-risk ratio favors your profits more than your losses, you will come out ahead.
In American baseball, even the best hitters only get on base about 30% of the time. That means even the best fail about 70% of the time. Consider a forex trader who opens no trade with less than a 3:1 reward-to-risk ratio. Assume, for the sake of simplicity, that these three trades all offer a potential reward for 30 pips and a loss of 10 pips.
If the trader loses two trades and sets his or her stop loss properly, that means he or she will lose a total of 20 pips on the two losing trades. But his or her winning trade would gain 30 pips. This means that he or she would have made an overall profit of 10 pips, despite losing more trades than he or she won.
Stop loss is one of the most important parts of a good risk management strategy. Find out where to set your stop loss - and why it matters here>>
Myth #8: The more technical indicators you use, the better
This is not true - in fact, it’s best to stick to one or two technical indicators at one time.
Understanding the fundamentals of the forex market can be quite complex and take a long time to grasp. For that reason, there is something of a bias toward technical analysis when new traders enter forex. However, these indicators can distract from the market itself. This is especially true when many different technical indicators are used, so it’s best to stick to one or two at one time.
It’s important to consider the type of indicator you’re using. Two oscillators will often give the same signal based on roughly the same statistical information. If they are derived from similar information, they are not confirming each other, they are simply giving the same signal.
For confirmation, use two different types of technical indicators. For example, the relative strength index is an oscillator, while envelopes like Bollinger Bands and Keltner Channels are trend indicators. One is based on relative strength and the other is based on trend. When these two indicators are telling you the same thing, that's confirmation.
Myth #9: Only undercapitalized traders should worry about loss limits and stop loss orders
This is untrue - and it often depends on personal risk and capital. It’s often said that “real pro FX traders” don’t use stop losses or loss limits. These traders often trade for large financial institutions, so they are extremely well-capitalized. They may not have an actual stop loss order in place - but they have a number in their minds. However, their lack of an actual loss order should in no way deter you from using stop-loss orders.
Traders for large financial institutions typically have a mentality that is more aligned with the mentality of a stock trader whose stock just went down from $35 to $25. It's not what you expected, but you are in it for the long haul and aren't terribly worried about it. When you have a ridiculously well-capitalized account, your risk tolerance is different to that of the average retail trader. So, let them trade the way they trade and don't let that deter you from using stop losses and loss limits, which are essential to keeping the risks of forex within your tolerance level.