5 Risks That The Novice Forex Trader Ought To Be Acquainted With
Five Forex Trading Tips To Build Success
Just like almost all other forms of trading, Forex trading carries risks and those new to foreign currency trading need to know these before dipping a toe into the foreign exchange pond. Here we look at the 5 most common risks of Forex trading.
- 1. Forex scams
In recent years the industry has worked hard to sort things out and nowadays Forex scams are unquestionably a lot less common than they used to be. However, they do still happen.
It is relatively easy to open a Forex mini trading account, particularly using the Internet, 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 fund it and then disappearing without a trace.
To make sure that you do not get caught out you must check out any broker carefully prior to opening an account. Select a broker who is associated 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 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 benefits of the foreign exchange market is the fact that it can be enormously volatile with currencies moving significantly against one another in very short time periods resulting in rapid and considerable gains. The flip side of this however is that the market can also produce sizeable and fast losses.
Fortunately traders do have tools available to help to limit this risk and novice traders should familiarize themselves with these tools and ensure that they use them to the full whenever they enter a trade.
3. Credit Risk
Because there are always two parties (a buyer and a seller) taking part in every transaction there is always a chance that one party will fail to honor his commitment once a deal is completed. This normally occurs where a bank or other financial institution declares insolvency.
It is possible to lower 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
Whenever you are trading any pair of currencies you need to look for discrepancies between the underlying interest rates in the two countries involved because any discrepancy can result in a difference between the predicted profit and that which you actually receive.
5. Country Risk
Sometimes a government will intervene in the Forex markets to limit the flow of its country’s currency. This is unlikely to take place in the case of major world currencies but could occur in the case of minor and less often traded currencies.
These of course are merely a few of the risks involved in Forex Trading and novice traders will have to familiarize themselves with the others as they go. Nevertheless, a sound understanding of the risks explained here is essential before you start trading.