Busting Myths about the Forex Market Articles | Investing

By: Guy Starbuck

Have you ever typed the world ‘forex’ on Google? If you have, then the 57 million pages which turn up could have left you quite stunned, to say the least. But let me make an honest submission here. Most of those 57 million pages is simply full of garbage which includes scams, automated prize-winning ‘systems’ which assures you of an overnight ‘pauper to rich’ fortune, gurus who talk incessantly in websites about how they can turn your fortune if only you allowed them to trade using managed accounts, books full of over-promises and so on.

My idea is to blow some of these online ‘myths’ which surround online trading in the forex market so that you are better equipped to handle these ‘millionaires by dawn’ promises more effectively. I will try to offer you a solution with which you can do your own research and make informed decisions regarding trading in the forex market.

Myth #1

Make money through day trading or trading within short span of time.

Reality: Consistency is the key to successful forex trading. There are two realities which this market faces: prices rise and they also fall. When you trade for a short span of time, you are essentially guessing wild which way the market will move. The market can move in this short time without any plausible reason. It is like flipping a coin. It can fall with any face up. Technical or chart analysis are irrelevant during these short spans. If you take my advice, do some bird watching and do the analysis yourself. It is imperative that you have to know the long term trends. Or else, you would be playing darts in the dark.

Having said this, there is only one way to get the hang of the market or a technically proven indicator – to understand retracements using the Fibonacci principles. Essentially this principle is all about the reality that when the market retracts, it usually reaches some key points as it retraces. The most important number is 50% or the 50% retracement rule.

Though this may not be the golden rule, but let me reiterate that if one believed history, then there is some element of truth in the 50% retracement rule which actually works more often than not.

Myth #2

Doubling your forex account is easy. Simply (use the broker’s name or the site)

Reality: Remember any broker who promises you a monthly return of 10% is engaged in using your money in something else other than the forex market. This is the reality and probably contrary to your belief that this could be true since the site has been paying a lot of money during the past several months.

Let me confess my own experience. I opened a managed account with a site, whose name I do not wish to take who was averaging 20% every month and had been in operation for a couple of years. Just when I was getting happy with my decision, the site simply vanished and that too with my money. From this very expensive experience, the lesson drawn is that when an advertising claim sounds too good to be true – leave it at that.

While it is true that there are thousands of sites which promise returns upwards of 50 top 100%, believe me, it can not just be true.

Myth #3

Automated Software is better than Human Based Trading

I have heard about this ever since I started to do forex trading online. The whole idea revolves round taking away the human angle and replacing it with mechanization to reap in extra profits. Since there are negative human emotions like fear and greed which are rampant in this trade, an emotion-less computer simply churning out feasible numbers seem to take the cake.

Reality: the paradox is that you can not do away with the human component totally, simply because human ambition, call it greed, or fear, call it apprehension are the two prime drivers in forex trading. Relying on fully automated software is only accomplishing half your goals.

It happened to me a couple of years ago when I bought myself some software which would make all my trading automatic. Luckily I tested the software using a demo account because to run it I would have gone bankrupt. The truth is that a computer can give accurate indicators, much like the intelligent and knowledgeable human mind.

On the other hand, if someone did indeed develop a ‘bot’ why should he sell it? Like they say, if it sounds too good to be true, probably it is.

Myth #4

Trading the news is the quickest way to profits and even a newbie can do it.

While it is true that trading in news make the pips jump, there is a flip side to it also which many traders do not even talk about.

Since trading has to be done super fast, most trading platforms usually perform slower than the required rate during these high volume periods. The worst side is that it is impossible to tell which brokerage firm is better since all trades are spotless on demo accounts. The net result is that while you can get in to trading but can never get out when you want to.

To give you a real life example, I subscribed to a service where there was provision for traders to enter a chat room. He had one of those Reuters tickers (approximately costing $250) which enabled him to get the news at the exact time when the banks got the information. Essentially he would get the news and advise his clients to buy, sell or do nothing. When something really fabulous happened, it would break for 60+Pips. It would have been excellent if only I had got in on the trade. I tried with nearly 5 different platforms but all of them were either too slow to open or crashed at the time of the news. This was extremely upsetting.

It was only after I investigated the problem that I realized that I was not the only victim – nearly every trader had this problem.

Thus the only way I could tackle this problem was to make a calculated ‘guess’ as to the movement of the market and place a stop/loss point on either side just in case it went the other way. But then, is this trading or gambling?

So the lesson learnt in this was that if you are going to trade news, be prepared to meet some serious obstacles on your way.