There are many misconceptions when it comes to Forex (FX) Trading. The top three misconceptions we have seen would be that it is a product that has high risk, high returns, and is too complicated.

Risk affects all asset classes, not just FX, and the key lies in how a trader manages trading and the risk-reward ratio. You can run very conservative strategies or take on risky bets, regardless of the asset class.

Here we use a simple example of stock trading: if you buy ABC shares at US$100 today and the price is going down, it is up to you to exit the trade at either US$99 (one per cent loss) or US$95 (five per cent loss) or even say US$70.

Now at US$70, it is essentially a 30 per cent drawdown, is this considered risky? Will you cut your losses before that? Investors will need to consider how many losses they can tolerate against the potential returns to determine the risk-reward ratio they are comfortable with. 

Unfortunately, FX trading has been associated with many get-rich-quick schemes or gambling for quick profits. In reality, there are no ridiculously huge gains or lottery-like winnings. There may be an occasional lucky trade that makes a good amount of profit, but it is simply not sustainable and possible to constantly make such trades.

Trading FX is just like trading any other asset class and requires a great deal of analysis, patience, and a disciplined approach to risk management. 

Lastly, FX is often misconceived as being too complicated. Of course, the presumption here is mainly due to the lack of knowledge, and in general, we find that investors are not as familiar with FX as compared to the stock or bond markets. This is also because there are not many regulated retail products in FX out there that are available for subscription.

As players with experience and knowledge of the FX markets, it is definitely more intuitive and safer in our own view. Although many may find stock trading more approachable or commonplace, it presents its own set of challenges.

Besides monitoring macroeconomic news and the company’s financials, one needs to track corporate actions, press releases, management movements, company restructuring, etc. There are just too many factors to keep track of in stock trading, and this is not the case for FX.

As with all investments, investors need to do their own due diligence, and they have to understand what they are getting themselves into. The risk lies in not understanding what you are doing.

An evergreen asset class

For all the years that we have invested in currencies, we have been fortunate not to have a losing year. FX is an evergreen asset class, unlike other asset classes, which can be more cyclical. Equities, for example, tend to cycle through several years of bull or bear markets. On the contrary, FX is not that seasonal, making it possible to aim for and achieve positive returns every year.

Also Read: 6 skills that startup founders can learn from forex trading

For the past three years, we have seen a lot of major events, from the pandemic global lockdowns to the Russia-Ukraine war, but we have stayed resilient throughout. We know that we are doing something right when we get texts from our clients saying that we are the only green in their portfolio again during such market events.

We believe that currency strategies can have a place in everyone’s portfolio. Many investors in Singapore are heavily weighted in properties, equities and bonds. We have seen that adding FX has helped our clients provide liquidity to their portfolios; it has also helped them diversify their portfolio holdings and reduce concentration risk. Moreover, FX itself can serve as a source of reliable returns for long-term portfolio growth.

We get a lot of questions about our secret strategy or proprietary algorithm that has been able to deliver such returns. For anyone who has spent a good amount of time trading, they will tell you that there is neither a holy grail nor one indicator or strategy that would give you profits 100 per cent of the time.

In fact, consistently profitable traders will more likely tell you that losing and winning are all part and parcel of the journey. The key here is to keep to your risk limits closely.

What new traders should take note of

Most new traders lose their monies when they first try their hand at trading. The advice would be for new traders to trade on demo accounts for at least three to six months first. Once you are comfortable with your performance,  try to allocate a very tiny fraction of your portfolio into live trading and ensure that you keep to your trading plan at all times.

You are going to notice that trading on demo accounts and live accounts could result in very different outcomes. So just start small and think that you could probably lose everything to the markets. 

We also find that most people who are just starting out and exploring trading typically just want to have their funds invested and to let their money work harder for them. In this case, perhaps the more prudent way is to manage funds by professionals instead.

While there will be fees paid to the managers, do note that there is also a need to factor in the cost of your time and energy and the high probability of losing all your capital when you trade on your own.

If you cannot set aside time to monitor the markets, a good strategy is to engage the right expert in the field and let the professionals manage the investments for you. Lastly, maintain good communication with the managers, and you can trust your money to grow to suit your lifestyle and future plans.

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