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

By plrprousers | October 9, 2008

Foreign currency trading, just like many other types of trading, carries risks and the novice Forex trader needs to be aware of these before beginning to trade. In this article we will consider the 5 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 nowadays Forex scams are certainly far less common than they used to be. Nevertheless,they do still happen.

It is quite 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 setting up a website posing as a broker, inviting you to open an account and fund it and then vanishing without a trace.

To make sure that you are not caught out you should check out any broker very carefully prior to opening an account. Select a broker who is associated with a major financial institution (such as a bank or insurance company) and who is additionally registered as a broker. In the United States 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 draws of the foreign exchange market is that it can be enormously volatile with currencies moving considerably against one another in very short time periods resulting in rapid and considerable gains. However, the other side of the coin is that the market can also produce large and rapid losses.

Fortunately traders do have tools available to help to limit this risk and new traders need to familiarize themselves with these tools and make sure that they use them to the full whenever they open a trading position.

3. Credit Risk. Because there are always 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 commitment once a deal is closed. This normally occurs where a bank or other financial institution declares insolvency.

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

4. Interest Rate Risk. When you are trading a pair of currencies you have 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 the profit which is actually received.

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 in the case of major world currencies but could occur for less often traded minor currencies.

Naturally, these are merely some of the risks of foreign currency trading and new traders will have to familiarize themselves with the others as they go along. Nevertheless, a good understanding of the risks explained here is vital before you start to trade.

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