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Top 8 Forex Trading Myths Busted
The forex market is 27x larger than the global stock market. If that didn’t make your jaw drop, here’s another fun fact. It’s worth almost $2 trillion, which is 2 followed by 12 zeros! And of course, such a huge market attracts a lot of speculation, scams and myths.
Knowing these myths and uncovering the truth helps you avoid mistakes while trading. Let’s look at some of the most popular forex trading myths.
The truth behind the most common forex myths
Myth #1 - All currencies are created equal
That’s far from being true. In fact, currencies can be broadly categorised as major, minor and exotic pairs. Only seven currency pairs make up around 85% of the forex market’s trading volume. These are the major currency pairs and one of the pairs will always be the US dollar.
Minors are formed by currencies of developed economies, aside from the USD. The exotic ones include the currencies of emerging and developing economies.
What does all this mean for traders? Major currency pairs have the highest liquidity and, therefore, the lowest spread. On the other hand, minor and exotic pairs have wider price swings, offering more attractive trading opportunities.
A well-balanced forex trading portfolio has a mix of all three types of currency pairs.
Did you know?
- The USD enjoys a safe-haven status among pro traders
- The AUD and CAD are called commodity currencies because their price is linked closely to the commodity market
Myth #2 - Forex trading requires 24/7 monitoring
Yes, the forex market is open 24/7. That doesn’t mean you need to monitor it continuously. Here are some timings to keep in mind when trading forex:
- US and UK overlap between 12:00pm and 4:00pm UTC: This is the most active period for global trading and is the best time to trade major currency pairs.
- Australia and Japan overlap between 2am and 4am UTC. This can be a good time to trade GBP/JPY, AUD/JPY, and EUR/AUD.
- New Zealand and Japan overlap between 5:30am and 8:30am UTC. This is the best time to trade NZD/JPY.
You can set alerts for your preferred entry points to grab opportunities while you’re not actively trading. You should also set up stop loss and take profit for your trades.
Myth #3 - Creation of wealth overnight
Who doesn’t want to get rich overnight? However, overnight success is one of the biggest forex myths out there.
The illusion arises from stories like that of George Soros, who is famously known as the “Man Who Broke the Bank of England.” Soros short sold $10 billion worth of pound sterling, earning a profit of $1 billion in 1992, leading to the GBP plunging steeply. That day has become known as “Black Wednesday.”
But such stories are one in a billion. And the profit isn’t the end of the story either. Soros has faced multiple losses and successes since then, but nothing compared to that one single trade that made him famous. The only way to maximise your chances of success in forex trading is to do your homework before opening or closing positions.
Wealth creation is a journey that starts with a solid foundation of knowledge and is fuelled by consistent skill-building to adapt to changing market conditions.
Myth #4 - The more the merrier
You cannot trade every opportunity. The more open positions you have, the higher your capital outlay and risk exposure will be. Also, trying to pull the trigger on every opportunity may lead to exhaustion.
A strong strategy trumps frequency of trading. Knowing when NOT to trade is as important as knowing when to trade. So, align your trading strategy with your financial goals and risk appetite.
Here's a pro tip: Set up trades only where the profit potential is more than 1.5X the risk.
Keen to learn more? Join FXTM today to get free trading education to build your strategy.
Myth #5 - Complex strategies are more profitable
So, you started with a simple strategy of looking at price movements. This worked for you, and you recorded a gain.
Beginner traders who make returns early often become too bullish too quickly. They want to increase their returns on every trade. For this, they try to add in more indicators to accurately time the reversals. This may not be the best approach, as using too many indicators can be confusing, leading to delays in decision making.
As you gain experience, you will learn more about forex trading. Even then, it’s best to keep your strategy simple and manageable. Stick with a system that works and tweak it to fit different market conditions.
Myth #6 - A “Holy Grail” strategy can guarantee success
A common misconception among traders is that they need one perfect strategy that performs across all market conditions. Do you wear the same clothes in winter and summer? Then what makes you believe the myth that one forex strategy can work under all types of conditions?
Adapting to changing situations is the key to survival in the markets. Fine-tuning your strategy according to events that impact your chosen currencies and economic data releases can maximise your chance of success. However, over-optimising is counterproductive.
Experimenting with strategies on a demo account can help you to understand which one works under specific market conditions.
Myth #7 - You can be right 100% of the time
We had to put this one on our forex myths to bust list. The erroneous belief creeps up to stroke egos after a few successful trades. The markets and the events that influence them can be uncertain. Trader sentiment also varies according to market conditions.
Even the most successful trader, including Warren Buffet, have seen their fair share of bad decisions and losses. The difference is that they learn from these experiences to refine their strategy. We suggest taking notes from Richard Dennis, who took losses from the market crashes of 1987 and 2000. He learned his lessons and held his position as the “Prince of the Pit” with poise.
Gracefully accepting losses and learning from your mistakes is key to eventually succeeding. The goal is to use a system that gives a slight edge over the current market conditions.
Myth #8 - Automation is fail-proof
The use of AI-powered algorithmic trading continues to gain popularity among traders of all experience levels. That’s why busting the myth that forex automation equals success is important. Automation does not guarantee success. If it did, the creators would be billionaires!
Instead, the use of technology helps streamline the trading process. AI assistance only improves the number of opportunities you discover. Automated trading also improves the number of trades you make without needing to monitor the markets. It enhances the speed and accuracy of the trading system it is fed. However, an AI assistant is only as good as the parameters you input.
Back-testing is the most essential component of algorithmic trading. Implementing a well-tested system is beneficial only when you configure it to your financial goals and risk tolerance.
Your automated trading system should be able to respond to market moves in a way that is best suited to your trading psyche. More importantly, if you use algorithms developed by other traders, back-testing and configuring them to your trading goals and risk appetite is crucial.
The bottom line
Over time, quotes may get distorted and turn into myths, misguiding forex traders.
Andreas Clenow puts this very simply to encourage traders to stay focused on what matters, rather than blindly trusting the “experts.” While inspiration and motivation are crucial, they cannot replace learning and skill development.
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