The 5 biggest forex myths you need to know
Whether you’re a forex pro or a total newbie, it can be hard to tell the fact from the fiction when it comes to making an international money transfer. The list below outlines some of the biggest myths in the world of forex, so you can steer clear of the hype and make an informed decision about your transfer.
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Myth #1: Forex is a short term strategy
The factors that underpin movements on the foreign exchange market are macroeconomic factors, and most of the time, those factors don’t change that fast. So while the day to day news cycle can cause volatile swings, there are still long term trends that exist in many currency relationships. This means that having a currency strategy that takes these long-term trends into account is important for maintaining a stable cash flow when operating a global business.
Myth #2: Your forecast is the way to win
Predictions and forecasts can cause you to lose sight of what’s really happening in the market due to cognitive bias. Behavioral economics has shown us that when you’re predicting, you’ll most likely end up seeing only what you want to see instead of adapting to what’s happening in real time in the market.
That said, having a forecast or a level in mind is not a bad idea, it’s just that many people become too emotional and don’t stick to their plans. A common saying in trading is to “plan the trade and trade the plan”. In order for your forecast to work, you need to detach from emotions, constantly reassess your strategy and be prepared to walk away if it’s not working.
Myth #3: The forex market is really risky
Many people are under the false impression that the foreign exchange market is actually a riskier option than other markets. The reality is that any market, any investment, and any trade needs to be assessed, and the risks need to be contained in order to achieve the best results. More growth usually means accepting more risk whether you’re trading currencies, stocks, bonds or investing in real estate.
Myth #4: Risk management is expensive
A common misconception is that it’s expensive to implement a currency strategy to mitigate risk, which isn’t necessarily the case at all. Managing foreign exchange exposure is one way to ensure that your business can carry on with a stable cash flow in the event of currency volatility.
OFX offer risk management tools like Forward Exchange Contracts, which allow you to lock in a favorable exchange rate and then transfer at that rate up to 12 months in the future. The benefit of using this tool is that it costs nothing, no deposit and if you need to cancel it, no fee. Similarly, Limit Orders, which let you choose a target rate for the team at OFX to monitor the markets to see if it’s reached and contact you if it does, which costs nothing to book and cancel.
How OFX's risk management tools compare:
|Spot Transfer||Limit Order||Forward Exchange Contract|
|Transfers money as a single exchange||Allows you to lock in a target rate and we market-monitor for you||Lock in a favourable rate and transfer later|
|Uses the rate secured at the time of transfer||Can cancel at anytime, or roll into an FEC||Can be used for up to 12 months|
|Great for everyday transfers and risk management||Helps mitigate risk in uncertain markets||Good for sensitive pricing schedules|
Myth #5: The trend is your friend
There’s a lot to learn about the factors that influence exchange rates. From milk in New Zealand to the travertine trade in Turkey, most professionals make the most money from focusing on specialised pairs and gaining a solid understanding of those key relationships.
Many newcomers to forex look at historical data and long term relative exchange rates to evaluate currencies. Professionals in forex understand that the fundamental relationships, like the commodities that drive the value of the AUD, will generally hold true over the long term. That said, forex is also heavily influenced by what’s going on right now.
New governments and trade policies, political and military turmoil, populist sentiment and current economic conditions will always trump historical valuations when it comes to pricing currencies in real time.
Trade wisely with the help of facts, not myths
Overall, using foreign exchange as a component of your overall investment portfolio, or to manage the ebbs and flows of running a global operation, can be a strategic way to diversify your assets, but staying informed is critical. Global money transfer specialists OFX provide comprehensive market news on all the major currency pairs daily and weekly. The quarterly Currency Review also takes a deeper dive into the nuances of what’s impacting major currencies like AUD, USD, GBP and more.