5 Risks That The New Forex Trader Should Be Acquainted With
Foreign currency trading, like almost all other types of trading, carries risks and those new to foreign currency trading need to be aware of these before beginning to trade. In this article we will consider the 5 most common risks of foreign currency trading.
1. Forex scams. Recently the industry has done a great deal to put its house in order and nowadays Forex scams are certainly far less common than they used to be. They do however still happen.
It is reasonably easy to open a mini Forex trading account, particularly using the Internet, and a Forex scam is simply a case of a crook setting up a website pretending to be a broker, inviting you to establish an account and fund it and then vanishing without trace.
To make sure that you are not caught out check out any broker very carefully prior to opening an account. Choose a broker who has an association with a major financial institution (for example, a bank or insurance company) and who is also registered as a broker. In the US brokers are either registered with the Commodities Futures Trading Commission (CFTC) or will be a member of the National Futures Association (NFA).
2. Exchange Rates. One of the benefits of the foreign exchange market is that it can be tremendously volatile with currencies moving considerably against one another in very short time periods giving rise to fast and substantial gains. The other side of this coin however is that the volatility in the market can also produce sizeable and fast losses.
Fortunately there are tools available to the trader to help to limit this risk and novice traders have to familiarize themselves with these tools and make sure that they make full use of them each time they open a trading position.
3. Credit Risk. As there are two parties (a seller and a buyer) taking part in each transaction there is always a chance that one party will not honor his commitment once a deal is completed. Normally this occurs when a bank or financial institution declares insolvency.
You can lessen any credit risk considerably by trading only through regulated exchanges which require members to be monitored to ensure their credit worthiness.
4. Interest Rates. When you are trading any pair of currencies you have to look for discrepancies between the interest rates in the two countries in question as a discrepancy can lead to a difference between the predicted profit and that which is actually received.
5. Country Risk. From time to time a government will intervene in the Forex markets in order to limit the flow of its country’s currency. It is unlikely that this will take place for major world currencies but might occur in the case of less frequently traded minor currencies.
Naturally, these are just some of the risks of foreign exchange trading and new traders will have to familiarize themselves with the others as they go. Nevertheless, a good knowledge of the risks detailed here is essential before you begin trading.
