Like almost all other forms of trading, foreign currency trading carries risks and the novice Forex trader needs to be aware of these before dipping a toe into the foreign exchange pond. In this article we will consider the five most commonly encountered risks of foreign currency trading.

1. Forex scams. Recently the industry has done a great deal to sort things out and today Forex scams are unquestionably far less common than they used to be. However, they do still exist.

It is fairly easy to open a mini Forex trading account, especially online, and a Forex scam in its simplest form is a case of a crook operating a website pretending to be a broker, inviting you to create an account and deposit money into it and then disappearing without trace.

To make sure that you are not caught out you must check out any broker carefully before opening an account. Select a broker who is associated 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 registered with the Commodities Futures Trading Commission (CFTC) or are a member of the National Futures Association (NFA).

2. Exchange Rates. One of the pulls of the Forex market is that it can be extremely volatile with currencies moving considerably against each other in very short periods of time leading to rapid and substantial gains. However, the other side of the coin is that the market also produces sizeable and fast losses.

Fortunately traders do have tools available to help to limit this risk and new traders need to familiarize themselves with these tools and ensure that they make full use of them each time they open a trade.

3. Credit Risk. Because there are two parties (a buyer and a seller) involved in every transaction there is a chance that one party will not honor his commitment once a deal is closed. Usually this occurs where a bank or other financial institution declares insolvency.

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

4. Interest Rates. When you are trading a pair of currencies you have to watch for discrepancies between the underlying interest rates in the two countries in question as any discrepancy can lead to a difference between the profit predicted and that which you actually receive.

5. Country Risk. Occasionally a government will intervene in the foreign currency exchange markets to restrict the flow of its country’s currency. This is unlikely to occur in the case of major world currencies but could occur for minor and less often traded currencies.

Of course, these are merely some of the risks of Forex trading and novice traders will have to familiarize themselves with the other risks as they go. Nonetheless, a good understanding of the 5 risks explained here is essential before you start to trade.

Tweet This Post

Technorati Tags: currency trading, finance, foreign currency trading, foreign exchange trading, Forex, Investment

One Response to “5 Risks The Novice Forex Trader Needs To Be Acquainted With”