5 Risks That The Novice Forex Trader Ought To Be Acquainted With
Like almost all other forms of trading, Forex trading has risks and the novice Forex trader needs to be aware of these before beginning to trade. Here we examine the 5 most commonly encountered risks of foreign currency trading.
1. Forex scams. Recently the industry has worked hard to straighten things out and nowadays Forex scams are certainly a lot less common than they used to be. Nevertheless,they do still happen.
It is relatively simple to open a Forex mini trading account, particularly using the Internet, and a Forex scam in its simplest form is a case of a crook operating a website posing as a broker, inviting you to establish an account and fund it and then vanishing without trace.
To ensure that you do not get caught out you should check out any broker carefully prior to opening an account. Select a broker who is associated with a major financial institution (like a bank or insurance company) and who is also registered as a broker. In the US brokers will be registered with the Commodities Futures Trading Commission (CFTC) or are a member of the National Futures Association (NFA).
2. Exchange Rates. One of the attractions of the Forex market is the fact that it can be enormously volatile with currencies moving significantly against one another in very short periods of time resulting in rapid and sizeable gains. However, the other side of the coin is that the volatility in the market also produces significant and rapid losses.
Fortunately traders do have tools available to help to limit this risk and new traders have to familiarize themselves with these tools and make sure that they use them to the full each time they open a trading position.
3. Credit Risk. As there are always two parties (a seller and a buyer) involved in every transaction there is a possibility that one party will fail to honor his commitment once a deal is completed. This generally occurs where a bank or financial institution declares insolvency.
You can 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 you are trading a pair of currencies you need to watch for discrepancies between the interest rates in the two countries in question because any discrepancy can produce a difference between the predicted profit and that which you actually receive.
5. Country Risk. From time to time a government will intervene in the foreign currency exchange markets in order to limit the flow of its country’s currency. It is unlikely that this will occur for a major world currency but could occur for less frequently traded minor currencies.
Naturally, these are just some of the risks of currency trading and new traders will need to familiarize themselves with the others as they go along. Nonetheless, a sound knowledge of the 5 risks given here is essential before you start trading.