Basics and Myths about Forex Trading

September 1, 2013 by  
Filed under Automated Forex Trading

The Foreign exchange market is the largest financial market in the world with an average daily trading volume of nearly trillion, out of which retail traders’ average daily trading volume is around .49 trillion (Source: Triennial Central Bank Survey 2010). The largest stock market in the world, New York Stock Exchange (NYSE), which trades a volume of about billion each day dwarfs in comparison.

If you are new to the concept of forex trading, the content below will help you gain an understanding of the forex market, how it works and common myths that are wide spread in the forex market.

What is forex tradingForeign exchange or forex trading is exchange of one country’s currency with another one. Simply put, as a forex trader, you will be trading money. For example, you could be selling US Dollars and buying Euros, or buying US Dollars and selling Swiss Francs. In many respects, the price of a country’s currency is dependant on the relationship between the two economies and their prospective futures. Its exchange rate depends, among other things, on the country’s economy compared to other economies. Purchasing a country’s currency is like buying a share of that particular country’s economy. If the country’s economy does well, the value of your currency will increase which you can profit from.

Unlike other traditional equity and futures markets, there is no central trading location in foreign exchange. Generally, trading is done using telephones or Internet. The primary market for currencies is an ‘interbank market’ which includes a network of banks, insurance companies, large corporations and other large financial institutions.

Commonly traded currency pairsSome of the major currencies traded are the United States Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss franc (CHF), Australia Dollar (AUD) and New Zealand Dollar (NZD). They are called as ‘majors’ because they are most widely traded currencies. Here is a short list to get you started: USD/JPY, USD/CHF, GBP/USD, EUR/USD

In order to have value in anything it needs to have a relation to something else. Think of a share of Microsoft in relation to the US Dollar, its symbol would be MSFT/USD, whereas you’d be buying MSFT and selling your USD. Currencies are traded in pairs as well, where you are buying one currency and selling another. For example, you would buy the euro and sell the U.S. dollar (EUR/USD).

Benefits of Forex TradingThere are many benefits of retail forex trading. Many people choose it because it may not involve commissions, or middlemen, or is a 24 hour market with high liquidity and very low barriers of entry. Along with these benefits the forex market is surrounded by many myths. Some of the common myths are:

Myth #1 – Make you rich with no riskMany people think that forex trading makes them rich in no time. But you need to understand that forex trading is just like any other speculative market, huge gains can occur but that is always accompanied with a lot of risk as well. And with any speculative market, long term success does not come easy, rather a lot of hard work and dedication is involved.Myth #2 Market is predictableIt is a very common myth that forex market is predictable. Many companies on the Internet and other media claim that they have found a scientific method, system, or indicator to predict the market. While it is true that some systems do show great returns for limited period, the market is quick to dispose of these, usually within 6 months. Conventional wisdom alone would suggest the guy selling you a system on the Internet isn’t using it himself – or why would he sell it? Myth #3 Listen to the expertsOne of the most enduring myths about the forex market is that experts can guide the traders to untold riches. Again, experts can be a wealth of information, but seldom would any expert give away the golden goose unless it is not laying eggs anymore. And remember “experts” is a loose term where someone in a position of authority is usually placed on TV to decimate information with a hidden agenda. Just remember to second guess everything and do your own homework.

To concludeAs a smart retail forex trader you need to stay away from these stereotypical myths. Don’t use shortcuts or look for easy money you’ll get burned. Remember, there are no secret formulas or scientific methods that can guarantee your success, rather hard work and asking a lot of questions. It is however advised to seek a professional help with the basics, such as understanding technical and fundamental analysis, proper money management, and most importantly – your trading psychology (emotional intelligence).

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