Market Stakes

Forex trading, just like most other types of trading, carries risks and those new to Forex trading need to know these before dipping a toe into the foreign exchange pond. In this article we will consider the 5 most common risks of foreign currency trading.

1. Forex scams. In recent years the industry has worked hard to put its house in order and nowadays Forex scams are unquestionably far less common than they once were. However, they do still happen.

It is relatively simple to open a mini Forex trading account, especially online, and a Forex scam in its simplest form is a case of a crook setting up a website posing as a broker, inviting you to open an account and fund it and then disappearing without trace.

To make sure that you do not get caught out you must check out any broker very carefully prior to opening an account. Pick a broker who has an association with a major financial institution (like an insurance company or bank) and who is additionally registered as a broker. In the US brokers are registered with the Commodities Futures Trading Commission (CFTC) or are a member of the National Futures Association (NFA).

2. Exchange Rates. One of the benefits of the Forex market is that it can be enormously volatile with currencies moving considerably against one another in very short periods of time leading to fast and significant gains. The other side of this coin however is that the market also produces significant and rapid losses.

Happily traders do have tools available to help to limit this risk and novice traders need to familiarize themselves with these tools and make sure that they make full use of them whenever they open a trading position.

3. Credit Risk. As there are two parties (a buyer and a seller) involved in each transaction there is always a possibility that one party will fail to honor his or her commitment once a deal is completed. This normally occurs when a bank or other financial institution declares insolvency.

It is possible to reduce any credit risk substantially by trading only on regulated exchanges which require members to be monitored to ensure that they are credit worthy.

4. Interest Rates. Whenever trading any pair of currencies you have to watch for discrepancies between the underlying interest rates in the two countries in question as any discrepancy can result in a difference between the profit predicted and the profit which is actually received.

5. Country Risk. On occasions a government will intervene in the foreign currency exchange markets in order to restrict the flow of its country’s currency. It is unlikely that this will happen in the case of major world currencies but may occur in the case of minor and less frequently traded currencies.

Of course, these are just some of the risks involved in Forex trading and novice traders will have to familiarize themselves with the other risks as they go. Nonetheless, a sound knowledge of the 5 risks detailed here is essential before you start trading.

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