5 Risks That The New Forex Trader Needs To Be Acquainted With

Foreign currency trading, just like many other forms of trading, has risks and those new to foreign currency trading need to know these before beginning to trade. Here we look at the five most common risks of foreign currency trading.

1. Forex scams. Recently the industry has worked hard to sort things out and nowadays Forex scams are undoubtedly far less common than they once were. They do however still exist.

It is quite easy to open a Forex trading account, particularly online, and a Forex scam is simply a case of a crook setting up a website posing as a broker, inviting you to create an account and fund it and then disappearing without trace.

To ensure that you are not caught out you must check out any broker very carefully before opening an account. Pick a broker who has an association with a major financial institution (for example, a bank or insurance company) 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 attractions of the foreign exchange market is the fact that it can be enormously volatile with currencies moving significantly against each other in very short periods of time resulting in fast and significant gains. However, the other side of the coin is that the volatility in the market can also produce large 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 ensure that they make full use of them whenever they enter a trade.

3. Credit Risk. As there are always two parties (a buyer and a seller) taking part in each trade there is a chance that one party will not honor his commitment once a deal is completed. This usually occurs where a bank or financial institution declares insolvency.

You can lessen any credit risk significantly by trading only on regulated exchanges which require members to be monitored to ensure that they are credit worthy.

4. Interest Rate Risk. When you are 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 produce a difference between the predicted profit and the profit which you actually receive.

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

These of course are just a few of the risks of foreign currency trading and novice traders will have to familiarize themselves with the other risks as they go along. However, a good knowledge of the 5 risks detailed here is vital before you start trading.