Considered the largest financial market on the globe, the forex market is a beehive of activity that features an interplay of market forces of demand and supply. In modern times, most exchanges take place online rather than on brick and mortar trading floors. This improved connectivity and exposure to a vast number of people has however, led to many myths being formulated about the market. As a trader who wishes to improve in decision-making and strategy, it’s imperative to weigh these myths against facts. We run down 5 top facts that are a must-know for progressive trading.
1.9 In Every 10 Traders Lose Their Investments in the First Few Months of Trading
Research shows that contrary to popular beliefs, majority of first-time traders lose their investments. This is mainly due to lack of knowledge and psychological control. Most newbies get into the market without adopting a working strategy. At other times, they may have a working strategy but fail to use it as required. In the end, 9 out of every 10 traders usually count their loses and close shop in less than 6 months of active trading. It’s the lucky few who survive that actually live to test their strategies and develop long-term goals for their investments.
2. All Brokers Aren’t The Same
Your broker can determine how efficiently you are going to perform as a trader. So you have to do some research before you settle for one. For instance, while a broker including CMC Markets offers a wide variety of products and services, there are some who limit the scope of their traders. Spread charges, customer service and even transparency may also vary from broker to broker. You therefore want to limit your search exclusively to a list of top brokers who operate transparently, treat their customers well and most importantly charge reasonable fees in spread.
3.Bulls Win, Bears Win, Pigs Are Slaughtered
A common blunder made by most first-time traders (and sometimes even experienced traders) is trading based on emotions or the urge to make quick returns. If you are anxious, you are likely to feel the need to open a new trade every single minute hoping to capitalize on every opportunity. At the same time, you may engage in revenge trading. That is, you lose a trade but feel like you have to revenge and regain your money and so you open two more trades. All those habits contribute to a recipe for failure. No matter how well trained you are, a strategy that encourages you to overtrade or revenge-trade is a no-no.
4.Banks Dominate The Forex Market
Over 70% of money traded in forex belongs to banks. Banks are mandated by their customers to keep cash for them and purchase currency on their behalf. Also, some banks use their customer’s deposits to engage in their own investments in an effort to enhance their profitability. The fact of the matter is that any person who opens a trade in a direction to what the major institutions are trading will fail. Data indicates that Deutsche Bank controls 14.6% of market share followed by Citi with 12.3% and Barclays Investment Bank with 11%. Only about 30% of the market is left for other traders.
5. 85% of Forex Market Price Movements Happens on 7 Currency Pairs.
Although there are many currencies that are exchanged across the world, only a handful are traded actively on the forex market. Normally, the most politically/economically stable and highly liquid currencies are sold and bought in sufficient quantities. A case in point is the US Dollar, which due to the USA’s sheer economic strength is the most traded currency in the world.
In general there are 7 currency pairs that cause ripples in the market namely (in no specific order): GBPUSD, EURUSD, USDJPY, USDCAD, NZDUSD, AUDUSD and USDCHF. Mathematically, there are 27 different pairs derived from the top 8 major currencies of the world. However, only about 18 of those are quoted on the foreign exchange market owing to their overall liquidity. This manageable number of currency choices makes trading less complicated compared to equities, where thousands of choices are presented.
Forex trading is all about facts. You have to analyze facts and figures before you make major decisions. Trading without facts is similar to making a shot in the dark. We hope the 5 facts we shared with you above will help you understand this diverse market better.