What is Forex Trading?

To put it very simply, foreign exchange (forex) trading is a type of investment where individuals around the world trade currencies to make a profit. They make predictions about the appreciation or depreciation of a currency, and shift funds from one currency to another in order to accumulate wealth.

The exact way this works will be better explained through a recent example. On Aug 4, 2022, the Singapore dollar reached an all time high against the Malaysian ringgit then, with 1SGD being able to be exchanged for 3.23MYR.

So let’s say a month ago, you decided to buy 1,000SGD using Malaysian ringgit at 3.16MYR/SGD. Now, a month later, you then change this S$1,000SGD back to MYR at 3.23MYR/SGD. Overall, you’ve made a profit of 70MYR (0.07MYR per SGD) by simply trading at the right time.

Over the years, forex trading has built a reputation for being many things. Some think it’ll help them amass a formidable fortune in a short period of time. Others think it’s unnecessarily risky, even more so than other investments. But which of these is fact and not fiction? Here are the most common misconceptions surrounding forex trading today.

1. Forex will make me quick money

While it is true that forex trading has historically made many people rich (George Soros, Steve Cohen, etc.), these individuals had years of trading experience, industry knowledge, and access to quick and reliable information, all of which contributed to their success.

Forex trading, like any other form of investment, takes practice and patience; there is no defined path to success and there are no free lunches here. Nevertheless, with time, consistency, and thorough research, forex trading can prove to be very profitable.

2. Forex is highly risky

All investments involve some type of risk and forex trading is no different. What gives forex the bad reputation as a particularly volatile and risky business is because leveraged trading may be involved.

Essentially, some brokers lend money to traders so that they can make exchanges by only paying a security deposit upfront. This allows you to trade a larger sum which translates into large profits with even the smallest changes in currency valuations.

Think back to the SGD/MYR example. With only an appreciation of MYR0.07 per SGD, the trader who buys and sells S$100 makes a 7MYR profit, but the trader who buys and sells S$10,000 makes a 700MYR profit.

But the flip side is also true – if you lose, leveraged trading will make you lose big.

ALSO READ: What's forex trading, and how to get started in Singapore

Leveraging is not unique to forex trading. You can see leveraging being used even in the stock market. However, the use of leveraging is far more available and common in the foreign exchange market, thus leading to the misconception that forex is significantly more risky than other investments.

Money appreciates in the tenths of a hundredth, and slowly at that, so to see substantial returns some traders leverage up to a 1,000 times of what they may actually have in their accounts. Higher leverage naturally leads to higher risk and greater potential losses, so be sure to do your due diligence and only invest what you can afford.

3. The more trades the better

Some might think that to make bigger earnings, a trader needs to trade more often with more currencies. This is one of the biggest misconceptions surrounding the foreign exchange market.

As it turns out, trading less and focusing on a limited number of currency pairs that you are knowledgeable about is usually the most beneficial strategy.

Unless you are familiar with scalping strategies or already have a vast amount of information about all the currencies, then concentrating on what you know, doing extensive research, and waiting for the best opportunities is the way to go.

4. Just follow what everyone else is doing

With one quick Google search you can find almost everything there is to know about forex trading, and this includes popular or advertised trading strategies about what, when, and how to trade. These can be enticing for a beginner who may not know much about forex trading.

However ultimately, it is your money on the line, and you will be the sole beneficiary of any profits or the bearer of any losses. Using advice from professional and experienced traders is a good starting point, but you should always come to your own conclusions before acting on any information. Nobody else has a vested interest in your investments other than you.

5. Forex is the same as exchanging money at the money changer

For all intents and purposes you technically can go to a money changer, swap all your MYR for SGD and when the Singdollar appreciates, swap it all back for MYR and make a profit. However this will typically not be the most convenient nor make you the most profit.

But nowadays there are platforms, sites, and people dedicated to making forex trades. These offer a range of services, from curated resources and news analysis to cheaper rates and more currency pairs.

Furthermore, these are all online, allowing you to trade from the comfort of your home rather than go down to your money changer. They also guarantee high security on your funds and this is important especially if you’re tying up a decently large sum; it would be hard to keep track of thousands of notes of other currencies lying around the house.

This is more than what your local currency exchanger can provide you, making forex trading platforms recommended over money changers, although you can achieve a similar effect by using them.

Conclusion

As the popularity of foreign exchange trading skyrockets and more people become interested in it, it is all the more important to not be swayed by myths and misconceptions.

Many misunderstandings surrounding forex trading can mislead traders and lead to negative consequences, especially when you put your hard-earned money on the line. Hence, it is crucial that you as an investor do your research and have the ability to distinguish fact from fiction the next time you trade.

This article was first published in ValueChampion.