In the forex market, many misconceptions exist. Some of these have become etched in the minds of traders as years of unfounded rumours came to be accepted as fact and transferred from one trader to another. This article seeks to debunk many of the misconceptions that abound in the forex market today.
Forex Misconception Number 1: Brokers Monitor Traders’ Positions & Stop Them Out Prematurely
This is not entirely a misconception. Some brokers have participated in stop hunting (triggering the stop loss on a trader’s position when in fact the market is yet to touch that price zone). However, AG Markets does not engage in this practice. While it is true that dealing desks watch traders’ positions, the idea that brokers watch traders’ positions so as to deliberately stop hunt them is not generally true.
Forex Misconception Number 2: There is Insider Trading in Forex
In a market with a turnover that exceeds 4 trillion dollars daily, very few parties have the financial muscle to significantly sway the market in an instant. Usually only central banks do this and they do this to intervene on behalf of a currency and not to profit from the moves. The only notable case of what looked like insider trading in forex is when the wife of former SNB Chief Phillippe Hilderbrand profited from the SNB minimum peg of September 2011 and even at that, she did not make a lot of money from the move. No charges were brought against her as the case did not fit the classical insider trading that occurs in the stock markets once in a while.
Forex Misconception Number 3: Forex Trading Decisions Can Be Made by Technical Analysis Only
It should be very obvious to some of you who have tried the markets out a little that just looking at a chart does not provide the total picture in making a forex trading decision. You have to get the complete picture by also looking at the currency fundamentals. If a central bank has made an interest rate decision which will affect a currency in a huge way, that decision will not respect a double top or a price retracement, and definitely will be blind to what a triangle or a wedge pattern is. Currency prices always respond to new fundamental information and just trading without considering this information can lead to disastrous consequences.
Forex Misconception Number 4: High Leverage Should Be Used All the Time
Large leverage is good, but is it always the best for you? Most modern cars can go up to 200miles an hour, but you certainly will not be driving at 200 miles an hour when entering your driveway, would you? It is the same with leverage. High leverage leads to astounding profits when the trade works out. But when it doesn’t, it could end badly. High leverage is best used for sure-banker trades with limited risk. Utilize high leverage only when you have identified a limited-risk trade and all risk management techniques have been applied.
Forex Misconception Number 5: Day Trading is Less Risky Than Overnight Trading
This is a huge misconception. Day trading is subject to plenty of market noise and is therefore riskier than overnight trading. Sadly, the trainings we see today in forex actually push new traders into day trading rather than trading with the trend which involves holding overnight positions. Besides, overnight trading actually requires less leverage because it can be used to gather many pips as the days pass by. Day traders look for fewer pips and therefore need more leverage to make money.
Forex Misconception Number 6: A Backtested Strategy is the Best Strategy
Backtesting is good, but it is based on hindsight and does not factor in other metrics that can affect a trade in real-time such as fundamental influences or emotional factors. Almost all forex strategies marketed to newbie traders are based on backtests and are touted to produce stellar performances. However, past performance is not indicative of future results. Market conditions are very dynamic and do not operate in a linear fashion. What was a major fundamental influence 8 years ago may not have as much effect on a currency today. So a backtested strategy is not always the best strategy.