Forex Trading Reviewer

Just like almost all other forms of trading, Forex trading carries risks and those new to Forex trading need to be aware of these before dipping a toe into the foreign exchange pond.

In this article we examine the five most commonly encountered risks of foreign currency trading.

1. Forex scams. In the past few years the industry has worked hard to straighten things out and nowadays Forex scams are unquestionably a lot less common than they used to be. They do however still happen.

It is quite simple to open a Forex trading account, particularly using the Internet, and a Forex scam is simply a case of a crook operating a website pretending to be a broker, inviting you to create an account and deposit money into it and then disappearing without trace.

To ensure that you do not get caught out you should check out any broker carefully before opening an account. Pick a broker who is associated with a major financial institution (like an insurance company or bank) and who is also registered as a broker. In the United States brokers will be registered with the Commodities Futures Trading Commission (CFTC) or are a member of the National Futures Association (NFA).

2. Exchange Rates. One of the attractions of the Forex market is that it can be extremely volatile with currencies moving considerably against each other in very short time periods resulting in fast and substantial gains. The other side of this coin however is that the volatility in the market also produces large and fast losses.

Fortunately there are tools available to the trader to help to limit this risk and new traders should familiarize themselves with these tools and make sure that they use them to the full each time they open a trading position.

3. Credit Risk. Because there are always two parties (a seller and a buyer) taking part in every trade there is a chance that one party will fail to honor his commitment once a deal is closed. Generally this happens when a bank or other financial institution declares insolvency.

It is possible to lessen any credit risk significantly by trading only on regulated exchanges that require members to be monitored to ensure their credit worthiness.

4. Interest Rates. When you are trading a pair of currencies you need to watch for discrepancies between the underlying interest rates in the two countries involved as any discrepancy can lead to a difference between the profit predicted and the profit which is actually received.

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 could occur in the case of less often traded minor currencies.

These of course are merely some of the risks involved in foreign currency trading and new traders will need to acquaint themselves with the others as they go along. However, a good understanding of the risks detailed here is essential before you begin trading.

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