3 Misconceptions About Forex Trading and Why it’s Good for the Economy

Despite boasting a market value that’s more than 2.5-times larger than the global GDP, the foreign exchange has a historical reputation as representing the shady face of trading.

This assertion was seemingly reinforced by the forex rigging scandal of 2015, when six multinational banks were fined a cumulative total of $5.6 billion for manipulating the markets and rigging underlying exchange rates.

However, this is not the only financial market that has been rigged in the digital age, whilst it’s also fair to say that the foreign exchange is a deceptively generative platform that benefits the wider economy. So, here are a few of the most common misconceptions surrounding the market and why they’re inaccurate.

  1. Forex Trading is a Way to Get Rich Quick

The historic perception of forex trading as a shady practice is borne out of its reputation as being a ‘get rich quick scheme’, but whilst it can be exceptionally rewarding investors must display considerable levels of knowledge, discipline and determinism if they’re to be successful.

So, whilst readily available leverage, small margins and extensive market hours may be empowering for investors, the fact remains that traders must work hard and smart if they’re to achieve a sustainable return.

Forex is also hyper-competitive, whilst the technologies available to traders (including online and interactive brokerage sites such as Oanda) have created a more even playing field for part-time and novice investors.

2. There’s Only One Correct Way to Trade

Contrary to historical belief, forex trading is not a one-size-fits-all activity, as there are various vehicles and methodologies through which people can generate income.

Traders also come in all shapes and sizes, which in turn means that they boast a unique approach to investing in currencies and tend to treat risk in a variety of different ways (whether they embrace this and look to leverage it to their advantage or seek flight).

As currency is also classed as a derivative asset class, it’s possible for traders to profit in a declining market, as they hedge against a specific currency pairing and cash in as its price continues to fall.

3. Greater Leverage Equals Greater Returns

Whilst extensive degrees of leverage are accessible in forex trading, this doesn’t always equate to greater returns.

In fact, whilst the potential rewards of high leverage are often lucrative, the risk isn’t always easily quantified and the imbalance between open position and your account balance can pose an exorbitant risk to the trade.

If this scenario does unfold, the heightened leverage can prove a significant liability, transforming a potential profit into a sizable and disproportionate loss.

This is an important consideration, as whilst you may be drawn in by the lucrative nature of the forex market it’s important to mitigate risk and quantify your trading decisions at all times.

image credit: Forex Trading via OHishiapply/shutterstock

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