5 Risks The New Forex Trader Ought To Be Acquainted With

Just like almost all other forms of trading, foreign currency trading has risks and those new to foreign currency trading need to be acquainted with these before dipping a toe into the foreign exchange pond. In this article we look at the 5 most commonly encountered risks of foreign currency trading.

1. Forex scams. In recent years the industry has done a great deal to sort things out and today Forex scams are certainly far less common than they once were. However, they do still exist.

It is fairly simple to open a mini Forex trading account, especially online, and a Forex scam is simply a case of a crook setting up a website pretending to be a broker, inviting you to open an account and deposit money into it and then disappearing without a trace.

So that you do not get caught out you need to check out any broker very carefully prior to opening an account. Select a broker who has an association with a major financial institution (such as an insurance company or bank) and who is also registered as a broker. In the US brokers will be 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 pulls of the foreign exchange market is that it can be tremendously volatile with currencies moving considerably against each other in very short time periods leading to rapid and considerable gains. However, the other side of the coin is that the market can also produce sizeable and rapid losses.

Happily traders do have tools available to help to limit this risk and new traders need to learn how to use these tools and ensure that they use them to the full each time they open a trading position.

3. Credit Risk. Because there are two parties (a buyer and a seller) taking part in each trade there is always a possibility that one party will fail to honor his or her commitment once a deal is closed. Generally this happens when a bank or financial institution declares insolvency.

You can lessen any credit risk significantly by trading only on regulated exchanges that require members to be monitored to ensure their credit worthiness.

4. Interest Rate Risk. Whenever you are trading a pair of currencies you need to watch for discrepancies between the underlying interest rates in the two countries in question because any discrepancy can produce a difference between the profit predicted and the profit which is actually received.

5. Country Risk. Occasionally 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 in the case of a major world currency but might occur for minor and less often traded currencies.

Naturally, these are just a few of the risks involved in foreign exchange trading and novice traders will need to acquaint themselves with the other risks as they go along. Nevertheless, a sound understanding of the risks given here is vital before you enter the trading arena.