5 Risks The New Forex Trader Ought To Be Aware Of

Foreign currency trading, just like most other forms of trading, carries risks and those new to Forex trading need to be aware of these before beginning to trade. Here we look at the five most commonly encountered risks of Forex trading.

1. Forex scams. In recent years the industry has worked hard to put its house in order and today Forex scams are undoubtedly a lot less common than they used to be. Nevertheless,they do still exist.

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

To make sure that you do not get caught out check out any broker very carefully before opening an account. Pick a broker who has an association with a major financial institution (like a bank or insurance company) and who is additionally registered as a broker. In the United States brokers will be 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 appeals of the Forex market is that it can be particularly volatile with currencies moving significantly against one another in very short periods of time resulting in fast and substantial gains. The other side of this coin however is that the volatility in the market can also produce substantial and rapid losses.

Happily traders do have tools available to help to limit this risk and new traders should familiarize themselves with these tools and ensure that they use them to the full whenever they open a trade.

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

You can reduce any credit risk considerably by trading only on regulated exchanges which require members to be 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 interest rates in the two countries involved because a discrepancy can produce a difference between the predicted profit and the profit which you actually receive.

5. Country Risk. From time to time 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 for major world currencies but could occur for minor and less frequently traded currencies.

Of course, these are merely some of the risks involved in Forex trading and new traders will have 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 to trade.