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

By plrprousers | April 27, 2009

Like most other forms of trading, foreign currency trading carries risks and the novice foreign currency trader needs to be acquainted with these before starting to trade. In this article we examine the 5 most commonly encountered risks of Forex trading.

1. Forex scams. In the past few years the industry has worked hard to put its house in order and today Forex scams are unquestionably far less common than they used to be. However, they do still exist.

It is reasonably simple to open a Forex mini trading account, especially online, 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 create an account and deposit money into it and then disappearing without a trace.

To make sure that you do not get caught out you should check out any broker carefully before opening an account. Pick a broker who has an association with a major financial institution (such as an insurance company or bank) and who is also registered as a broker. In the United States brokers will be either 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 foreign exchange market is that it can be extremely volatile with currencies moving a lot against each other in very short periods of time giving rise to fast and significant gains. The other side of this coin however is that the volatility in the market can also produce sizeable and rapid losses.

Happily there are tools available to the trader to help to limit this risk and new traders should familiarize themselves with these tools and ensure that they use them to the full each time they enter a trade.

3. Credit Risk. As there are always two parties (a buyer and a seller) involved in each transaction there is a chance that one party will fail to honor his commitment once a deal is completed. This usually happens when a bank or financial institution declares insolvency.

It is possible to lessen any credit risk significantly by trading only through regulated exchanges which require members to be monitored to ensure that they are credit worthy.

4. Interest Rate Risk. Whenever trading a pair of currencies you need to look 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 the profit which you actually receive.

5. Country Risk. On occasions a government will intervene in the Forex markets in order to limit the flow of its country’s currency. This is unlikely to happen for a major world currency but might occur in the case of minor and less frequently traded currencies.

These of course are merely some of the risks involved in Forex trading and novice traders will have to familiarize themselves with the others as they go. Nevertheless, a good understanding of the risks detailed here is essential before you start to trade.

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