Myths About Forex Trading

I traded forex for a while. Like to share some misconceptions about forex:

A global 24 hour market

First of all, we have to know that the market is not opened 24-by-7. Some people misinterpreted the above statement. Forex markets are opened 5 and a half days a week.

Ok, it is true that the market is there 24-by-5.5. Do you think there will be trades any time in the day? My experience is...this is not exactly true. That's why most educators advocate to trade during hours when major stock markets opening and closing hours coincide. That is when there will be more trading volume in the forex market and when most likely we can find bigger price movement. Even the 2 most traded currency pairs - EUR/USD and USD/JPY can be pretty flat or trend-less at times.

World’s Most Liquid Market

Ya...ya...and we don't have to worry about not being able to find buyers when we want to sell and vice versa...Well, this is true. However, we have to understand that not all currency pairs are equally liquid. One way to tell which currency pairs are more liquid is to look at the bid-ask spread, like with any other instruments, be it stocks, options etc. The bigger the bid-ask spread, the more illiquid the currency pair is.

Trade with no commissions

Many online forex brokerage offer commission-free forex trading experience. They do not charge any commission for the trades that we make. Well, actually, they have built in their commission into the bid-ask spread. InterbankFX is one of such a brokerage. If you look at the bid-ask prices for USD/JPY, they are 3 pips apart! What is 3 pips? For the mini-account is ~$3 and for the standard account is ~$30! Those brokerages that charge commissions for every trade entered will usually have a tighter bid-ask spread, something like 1 pip for USD/JPY.

Leverage - earn more with less

Many educators only mention about the positive side. We need to understand that there is a downside to this. Leverage is often labeled as a double-edged sword, like with any other instrument, the very fact that one can make more with little capital means he/she also can lose the same amount easily!

Some educators just tell us that 1 pip is ~$10 and ask us to calculate how long it takes to make back our course fees. Ya, we just need 20 pips a day to be financially free...but 1 pip = ~$10 is for standard accounts. For some brokerages, they have minimal account size requirements to open standard accounts (like $10,000 or $100,000). Even if some brokerages allow you to open standard accounts with $2000, you won't want to do that. You will get margin call easily.

Margin Call

Some educators do not highlight this. Allow me to demonstrate with a simple story. Let's say John has $5000 in his forex account. He uses $1000 as "deposit" also known as the used margin to enter a forex trade. He is left with $4000 usable margin. Simply put, if the trade goes against him and he loses an amount that is more than $4000, he will receive a margin call. And NO, this is unlike a friendly morning call. Some brokerages would require you to top up your account or they will flatten (close) all your positions for you! No other choices at all. Let's say John don't have money to top up his account. He loses $4000 and that leaves $1000 in his account.

Trade Forex on your mobile phone while on the move!

I personally have not experienced this before, and I don't know how to. I cannot visualize myself drawing trendlines, support and resistance lines on that tiny screen. Furthermore, I am quite slow with entering my trades on a full computer keyboard with mouse already. Not sure how I can make my trades in time on a mobile phone.