5 Risks That The Novice Forex Trader Needs To Be Acquainted With
Posted by: Donald Saunders in Business, tags: BusinessForeign currency trading trading, just like almost all other forms of trading, has risks and those new to foreign currency trading need to be acquainted with these before beginning to trade. Here we look at the five most common risks of foreign currency trading.
1. Forex scams. In the past few years the industry has done a great deal to put its house in order and nowadays Forex scams are unquestionably far less common than they once were. They do however still exist.
It is fairly easy to open a trading account, particularly using the Internet, and a Forex scam is simply a case of a crook setting up a website posing as a broker, inviting you to establish an account and deposit money into it and then disappearing without a trace.
To make sure that you do not get caught out check out any broker carefully prior to opening an account. Select a broker who has an association with a major financial institution (for instance, a bank or insurance company) and who is additionally registered as a broker. In the United States brokers are either 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 foreign exchange market is that it can be enormously volatile with currencies moving considerably against each other in very short periods of time giving rise to fast and sizeable gains. The other side of this coin however is that the market also produces large and rapid losses.
Fortunately traders do have tools available to limit this risk and novice traders should learn how to use these tools and ensure that they make full use of them each time they enter a trade.
3. Credit Risk. As there are two parties (a buyer and a seller) involved in each trade there is a chance that one party will not honor his or her commitment once a deal is closed. This generally happens where a bank or other financial institution declares insolvency.
It is possible to lessen any credit risk significantly by trading only on regulated exchanges that insist on members being monitored to ensure that they are credit worthy.
4. Interest Rates. When you are trading a pair of currencies you need to llok for discrepancies between the interest rates in the two countries in question as a discrepancy can produce a difference between the predicted profit and that which you actually receive.
5. Country Risk. From time to time a government will intervene in the foreign currency exchange markets to restrict the flow of its country’s currency. This is unlikely to happen in the case of a major world currency but could occur in the case of less frequently traded minor currencies.
These of course are just some of the risks of Forex trading and novice traders will need to acquaint themselves with the others as they go along. Nonetheless, a sound understanding of the risks given here is vital before you start trading.
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