Much of the retail currency exchange happens online as opposed to exchange floors, meaning that anybody with a good Internet connection can become a Forex trader. The high number of players and market participants has led to the emergence of many myths about Forex trading. Many of these fallacies are spewed daily on online forums, newspapers or even at your favorite hangout to unsuspecting newbie traders.
Here are 10 interesting truths about Forex trading to help you separate facts from myths.
Perhaps you have heard it said that the currency market has been shrinking and may even disappear altogether. This is true in some sense but not true in others. The average daily volume in 2016 was $4.8 trillion compared to $6 trillion a year earlier. While this at first appears to lend credence to the claim about a shrinking Forex market, the full reality is a bit more nuanced. Although spot Forex has been declining, Forex swaps volumes have been increasing. FX swaps turnover reached $2.4 trillion per day in 2016.
Meanwhile, the daily spot foreign exchange was clocked at $1.7 trillion per day in April 2016, 15% lower compared to $2.0 trillion in 2013. Stricter Forex regulation in many countries is the biggest reason for this trend. Additionally, the Euro, one of the most important Forex currencies, has been rather subdued. U.K. is the world's biggest Forex market. The country's market share has, however, been slowly declining, and was clocked at 37.1% in 2016 compared to 41% in 2013.
Overall, Forex remains the world's biggest financial market by far, and is unlikely to relinquish that position any time soon.
The United Kingdom and the United States are the two largest Forex markets, with market shares of 37% and 16%, respectively. The other large players are Japan (6%), Switzerland (5%), Singapore (5%), Hong Kong (5%), Australia (4%), France (3%), and Denmark (2%).
The Japanese retail Forex market is reputed to be the largest in the world. The retail Forex market is, however, much smaller than the spot Forex market with an estimated daily volume of $100-$200 billion.
Banks control the vast majority of Forex trading--70% of daily Forex trade volumes go through banks. This is hardly surprising considering that banks are mandated by their clients to hold cash for them and buy foreign currencies on their behalf. At the same time, banks use their customers' deposits to make their own trades and profit from them.
Below are the world's top 10 largest FX providers, with all but one (XTX Markets) being banks.
Although in theory there are dozens of possible currency pairs that can be traded in Forex, many brokers offer only a dozen or so on their platforms. And out of these, 7 currency pairs account for 85% of Forex profits. These pairs are EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF,NZD/USD, and USD/CAD
Your broker is your line of contact with the Forex market. Although many brokers offer fairly similar products and currency pairs, you will find significant differences between their spreads and their general customer policies. Additionally, some brokers offer better access to the big markets, something that can increase your odds of winning.
Do your homework and research the best brokers before committing your capital.
Forex trading is a wide field that requires years of practice before you can master the markets properly. Sometimes it might feel like the only way you can succeed is by understanding all those Forex signals, currency pairs, and every complex risk management strategy in the books.
The reality, however, is that the best Forex strategies are usually the simple ones. If your strategy is so complex that you cannot comfortably explain it to the average person, then it's probably the wrong one. An overly complex strategy is difficult to follow consistently, and failing to stick to your plan will almost guarantee failure sooner rather than later.
Although Forex trading has low barriers to entry and almost anybody can do it, the sad reality is that as many as 90% of first-time trader lose their capital within the first six months of beginning to trade.
Other studies have shown that women make better traders than men and, guess what? It all boils down to discipline, or lack thereof. The biggest reason why many newbie traders fail at Forex trading is also the biggest reason men fail more often than women do: they lack a clear-cut strategy and are often overconfident and too willing to take the wrong risks. Many newbie traders do not take the trouble to properly study how the markets work and tend to be swayed too much by emotion. The result: many fail before they even get properly started.
Many successful traders are not the ones who are lucky to have tens of thousands of dollars of trading capital at their disposal, but rather the ones who start small, gradually learn the ropes, and learn how to compound their gains. Many shrewd traders start with just a couple of hundred dollars and are able to trade their way up to sizable profits. Successful traders are able to comfortably live off their trading activities just a few years after getting started.
Understand the true power of compounding your gains.
One very common mistake that many newbie traders make is overtrading. Many mistakenly believe that time spent not trading represents lost opportunities. Some traders open multiple positions in the belief that this increases their chances of succeeding. Other traders engage in something that financial advisors call get-back-itis, which is a tendency to hold on to losing positions in the belief that things will eventually turn around in their favor. More often than not this only serves to increase their losses.
It's true that certain Forex trading strategies such as scalping, grid trading, and doubling up/down can generate huge volumes of trade. The kind of overtrading we are talking about here is one where the trader departs from their trading plan. Overtrading not only means paying higher commissions to your broker, but many studies have also shown that it results in significantly worse returns.
Many traders approach Forex trading with a get-rich-quick mentality. Unfortunately Forex trading does not work that way. Whereas it's true that even a fresh trader can make decent profits in their first few attempts, long-term and sustained success in Forex requires the trader to have a disciplined mindset and adopt a strategy that allows him to compound small profits over a long period. To be successful, a Forex trader should adopt effective money and risk management strategies. This involves keeping a trade journal where you record your entry date, price of the underlying position, size of the position, your margins, your exit date, profit or loss realized from each trade, and your mindset when you are making the trade.