In 2019, the forex market had grown to deliver a global daily turnover of $6.6 trillion, up from just $5.1 trillion three years’ previously.
This volume has increased further since, with developed markets such as Australia seeing a spike in the demand for forex and currency trading in the wake of the coronavirus pandemic and its associated lockdowns.
But what do we mean by forex trading, and what are the market’s biggest myths and misconceptions? Let’s get into it!
What is Forex?
In simple terms, the forex market is home to international currency trading, which is speculative in nature and classed as a derivative asset. Through the market, currencies are also traded as pairs, which describe the price quote difference between the two listed instruments.
More specifically, the first listed currency in a pair is referred to as the “base”, while the second that sets the price benchmark is called the “quote”.
There are also three categories of currency pairs; namely major (which feature seven pairs and account for 68% of total trading volumes), minor and exotic. Major pairs are considered to be the most stable, where exotic currencies are highly volatile but can deliver increased returns in the right circumstances.
3 Forex Myths Busted!
Now that you know the forex basics, the next step is to understand the biggest and most inaccurate myths facing forex traders. We’ve outlined some of the most prominent examples below:
- #1. You Need Lots of Money to Trade Forex: While having a large amount of capital as a forex trader means that you’ll have more margin and room for error, this isn’t a prerequisite of trading international currencies. This is thanks largely to the presence of leverage, which enables you to open and control disproportionately large positions with a small amount of starting capital. You’ll just need to manage your leverage carefully, as this can also increase the size and scale of individual losses.
- #2. Forex Trading is Akin to Gambling: While the speculative nature of forex trading and its underlying level of risk means that there are some similarities between this practice and gambling, there are also considerable differences to keep in mind. Most importantly, you’ll have to make informed and calculated decisions when plotting your forex trades, relying on knowledge, research and a keen sense of determinism to optimise your chances of success.
- #3. The Forex Market is Rigged: While there have been infamous examples of forex market rigging (such as 2013), such instances are relatively rare. Similarly, the short window in which the average exchange rate in currency trades is used to create a benchmark has been extended in the wake of rigging cases, making it much harder for nefarious individuals to manipulate market prices. So, the chances of you trading in a ‘rigged’ or unfair market are incredibly slim.