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Currencies, which have been so far better known as a medium of exchange and a store of value, are also preferred financial products of the trading community. Despite its ever-increasing popularity, unofficial statistics and even warnings from several analysts have provoked suspicion among many traders, especially novices, about the reliability of forex trading. Whether they should consider forex as a trustworthy and safe investment channel is frequently asked by those who have no or a limited understanding of the market. This article will help you answer the question before you decide whether to jump into this fray.
Forex Trading and Inherent Prejudices
We are surrounded by media hype that regularly exaggerates the significance of something and its massive benefits, ranging from how low carbohydrate diets keep us healthy to how software engineers earn a fortune with ease. But what is published in advertisements merely plays a tip of the iceberg, whilst hidden aspects are seemingly kept away from us.
The same also applies to investment careers and forex trading is never an exception. When you newly come to the market, you may notice that it always accompanies inherent perspectives, albeit good or bad, which possibly mislead you to insensible decisions. Here are some of those stances about the forex market that you should be alerted:
“Trading Forex Brings Lots of Money”
Various scammers often plant the seeds of tantalizing incomes in the trader’s mind with compelling adverts that forex trading will give you a fortune after a few transactions. This statement is not completely incorrect, but at least for the experienced who are capable of predicting subsequent market fluctuations and trade with caution.
The financial world historically records extraordinary achievements of those who once defeated the forex market, typically George Soros’s sterling short sale or Andrew Krieger’s venture on the New Zealand dollar. However, those events do not prove the odds of success are always stacked in their favor. Like other traders, they were also subject to multiple failures from which they gained valuable experience and improved their comprehension of the market though.
Nevertheless, there is no denying that many beginners aggressively flock to the market with poor preparation and little awareness of potential dangers they may encounter. They dislike hearing their peers pull off whilst they do not. So their belief in success is cemented by the subjective viewpoint that nothing is impossible but ignore the fact that this spell does not apply for those who are poorly informed of the market.
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Various European legitimate brokers indicate that more than 70% of their clients lose money from trading forex, whereas the remaining share may end up either generating handsome incomes or managing a goalless draw. This reality proves foreign exchange deals do not always bring traders big bucks as expected, but worse, puts them on the brink of devastating losses.
“Trading Forex is Easy”
Various traders presumably take a position on how easy trading forex is. Imagining that they spend hours reading through instructional materials, test out trading strategies on demo accounts and technically analyze price actions is far simpler than doing.
You may say entering the forex market is rather straightforward. With a few clicks to open an account on the broker’s customized trading platform, you can engage in any currency speculation transactions. No legally binding conditions are imposed nor certificates are compulsory, which makes the forex market more accessible and partially reduces pressure on traders.
Having said that, it does not facilitate forex trading as participants often have difficulty dealing with unanticipated events that affect market sentiment and probably lead the market to an unprofitable direction. For this reason, forex has become more complicated and volatile, especially during times of world upheaval.
“Forex Trading is Gambling”
Multiple governing bodies and economists regard forex trading as nothing short of gambling. Concurrently, facing the incredibly high washout rate in the currency market, various countries either impose a ban on this sphere or allow residents to work with local brokers who are under stringent regulations.
By definition, gambling refers to the process of risking something (i.e. money, time and effort) to hope for financial gains. Similarly, currency traders also favor betting on temporary price movements and dealing in forex pairs on margin accounts for greater profits rather than benefiting from currencies’ intrinsic value over a long time. Therefore, the statement that transacting foreign currencies assembles gambling, to some extent, holds true.
However, forex trading is inevitably more than the act of gambling provided you treat this side hustle seriously in lieu of seeing it simply as a means to entertain.
No marketing executive can hold a successful advertising campaign without understanding the most fundamental theories, learning about the customer segment through lots of surveys and analyses, and even suffering failure streaks. There is no exception for currency speculators.
When trading forex is associated with greater risks than any ordinary job, traders must work much harder to enjoy the fruits of their endeavors one day. In other words, you are likely to increase the winning rate from trading currencies, whilst that of gambling reaches close to zero because of casinos and betting apps implicitly take over the competition as usual and accordingly expose players to a dead duck.
Can I Trust Forex Trading?
Forex trading is still a legal activity although it is prohibited in several jurisdictions. Until now, not many countries have enacted stringent laws to administer transactions conducted by traders in the market. Instead, only directives that regulate forex brokers are issued by local and international organizations in attempts to build a transparent trading environment and minimize the likelihood of anti-money laundering. No severe regulations or sanctions are imposed on traders to curb the frenzied use of high leverage.
On the one hand, all traders recognize that banks and large financial institutions are dominant players who contribute the majority of trading volume to the market’s liquidity, regardless of the fact that the whole forex pie is categorized into more shares. The advanced technology, coupled with the deregulated nature of forex, enables retail traders to open a position via the decentralized system. They may even make a naked short sale on available currency pairs, which means making money from the market’s plunge without the delivery or receipt of physical assets. These so-called benefits can be turned into nuisances and make failures worse.
The mentioned descriptions hardly reduce people’s faith in the market nor make it less attractive. Traders acknowledge and even high stakes that may exist in the market but rush headlong to forex like a moth to a flame. So the forex market is not totally to blame for any of their massive losses which are supposed to mainly stem from the unwise decisions of traders in choosing a broker, managing risks and more.
For that reason, forex is still a trustworthy investment market. However, success or failure depends more upon your capabilities and experience.
Golden Rules Before Trading
If the key to success lies in your hand, you had better memorize the following essential principles to trade with more confidence and efficiency.
Formulate a Detailed Plan
Trading forex differs from going to a department store and purchasing some personal stuff. What you have to deal with in the currency market are institutional participants and major news announcements. And you always need an intensive strategy before entering the competition.
That plan should include your risk appetite, proper leverage ratio, position size, kinds of forex pairs, times of trading, necessary deposits and much more. It needs to be tested out in a simulated environment or with a nano account multiple times before applied in a more fierce battle. What’s more, many profitable strategies are just a flash in a pan, so you are recommended to review and modify your plan often to better adapt to the market moves. If you know nothing about making a proper plan, you may reference that of other successful traders by enrolling for their courses or tuning in to the personal analyst’s webinar.
Trade with Flexibility and Determination
Forex newcomers may feel more exhausted and discouraged than those doing nine-to-five jobs. Because of that, it requires you to be determined enough to overcome a feeling of disappointment and depression when you fail or bump into any obstacles. Sticking to the strategy is a must, but sometimes you need to wing it when any unprecedented occurrence happens.
Risk management is always the first lesson you should take when learning about forex trading. To prevent greater losses than what you can bear and lock in acceptable profits, you need to ponder a stop-loss order and a take-profit order in each transaction. Some brokers also empower clients to place a guaranteed stop that ensures the closing of your position at a predetermined price or a trailing stop that moves together with the market trend.
Diversify Your Portfolio
You should not put all eggs into one basket because nothing guarantees the basket will permanently endure and those eggs will never be broken. Thus, a diversified investment portfolio may spread out potential risks. Instead of trading only one currency pair, you had better trade multiple forex instruments and look at other assets (e.g. stocks, bonds or cryptocurrencies) as well.
Further, you may simultaneously open accounts with different forex brokerages as a precaution against the case that any of them get insolvent and you hardly receive your funds back.
Pick a Reputable Broker
Ease of entry to the forex market also causes an uncontrollable increase in scammers who can manipulate your currency deals behind the scene without your noticing. So, to protect your account balance from any financial crime, you should cooperate with a reputable broker who is under the legislation of competent authorities. For example, when brokerage companies that are regulated by the Financial Conduct Authority (FCA) fall into bankruptcy, their clients are pledged to receive up to $50,000 per account. This policy buffers heavy tolls from any default risks.
Never Stop Learning
Nobody always grows self-assured about their complete understanding of their industry and occupation, even after years of working. In a more complicated sector like forex trading, the learning curve is steeper and any delay in updating the latest news about the market can increase your losing rate. Hence, you must never stop learning if you would like to pursue this job.
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