The many myths around currency trading By Jitendra Parasher

It’s quite common to see alluring advertisements in business publications, online platforms and television channels about the magical wealth creating potential that currency trading offers. Currency trading is often pitched to consumers as less riskier than buying or selling stocks, and more steadily profitable.

In general, forex or currency trading is a big black box for small investors. Those who get into it, taking the bait of offered by clever marketers, often find themselves trapped in a vicious cycle of loss making trades. The promised Eldorado never materializes. This leads them to reach the quick conclusion that currency trading is nothing but a scam. Now let’s look at the realities about trading in currency markets. Here are some popular myths that need busting.

1. Forex trading is the easiest way to make money!

Fact: As they rightly say “Money doesn’t grow on trees.” Forex or currency trading is certainly not for the people who are looking for a way to become wealthy overnight. However it doesn’t mean that money can’t be made by trading forex. There are many investors across the globe who have been making a living and generating consistent returns from trading currency markets. Therefore one can expect decent returns by trading in currencies, but few things life come with a guarantee card.

2. Forex trading gives sure shot returns without any efforts!

Fact: There is a hard but interesting fact that one should know about trading in general and before investing your hard earned money in any risky asset class. Approximately 80-85% of participants who enter trading without proper understanding or knowledge of financial markets functioning tend to lose money in trading and only other 15-20% participants make money. Efforts made in right direction to understand the markets are one of the major decisive factors for your success in currency trading. Therefore forex trading is not a way to generate sure shot financial returns and it requires efforts too like any other business.

3. Brokers offering the highest leverage on your margin money are the best.

Fact: Well, to break this myth let’s get familiar with the term “leverage” first. As per Investopedia, leverage in trading implies “the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment” or in simple words, when you take leverage from your broker for trading purpose that means you are trading with borrowed money or the money you don’t own. Just like any other business, the more borrowed money you begin with, the more difficult you make your money management and risk management. Therefore one should always try to begin trading with least or no leverage, to remain in the business longer.

4. RBI allows Forex trading with brokers abroad.

Fact: Today we have a large number of websites or brokers abroad who claims to provide with the best trading services and highest leverage on deposited margin money. But beware of such websites and online trading portals, as per RBI circular No. 53 dated April 7th, 2011 and circular No. 46 dated September 17th, 2013, it has been clarified that overseas forex trading through digital trading portals, in respect of the margin payments being made by their customer for online forex trading transactions (directly /Indirectly) through their credit cards / Net Banking is prohibited for resident Indians. Therefore one must know that transferring your money to a forex trading account with a broker abroad is violation of Foreign Exchange Management Act (FEMA), 1999 and may cause legal action against you.

Efforts made in right direction to understand the markets are one of the major decisive factors for your success in currency trading. Therefore forex trading is not a way to generate sure shot financial returns and it requires efforts too like any other business

However it doesn’t mean that an individual can’t trade in currency markets. There are legal ways of trading forex in India as Indian exchanges like National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange (MSEI) provides an opportunity to trade in currency derivatives and the list of registered brokers for currency derivatives segment can be easily be found on Securities and Exchange Board of India’s (SEBI) website. To be continued...

Written By: Jitendra Parasher