Table of Contents
Chapter 1: What is Forex Trading
Chapter 2: History of Money and Origins of Forex Trading
Chapter 3: Forex Trading Terminology
Chapter 4: Important Aspects of Forex Trading
Chapter 5: Players in The Forex Market
Chapter 6: Factors that Affect the Forex Market
Chapter 7: Risks Involved With Trading Forex
Chapter 8: Why Trade in the Forex Market
Chapter 9: How Forex Trading Works
Chapter 10: How to be a Successful Forex Trader
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Chapter 7: Risks Involved With Trading Forex
– Amplification of Losses
– Constant Fluctuations
– Lack of Information
– High Maintenance
– Absence of Regulations
– Frauds
– Price Uncertainty
Chapter 7: Risks Involved With Trading Forex
The forex market is not a place for amateur investors. Investing here with any chance of success requires a good understanding of the processes and techniques involved. The investor will also need a good grasp of various factors affecting the markets and how he must react in order to turn any circumstances to his advantage. The greatest advantages of the forex markets, its size, liquidity, adaptability and opportunities can also become the pit falls if an investor begins trading without understanding the risks.
Leverage is considered the most attractive aspect of forex trading. An investor can make massive gains with just a small investment because of a high leverage in the forex market. The high liquidity in the market and the constant fluctuations in price help a smart investor make quick substantial gains by putting up just 1% of the total investment amount from his own funds. The rest can be borrowed from the dealer.
In a forex trade, the price fluctuation is not the only basis for profit. It is the leverage which causes gains to multiply. The actual price fluctuation in the value of currency is very small. In order to make the biggest possible gains, huge leverage is necessary.
However, leverage works both ways. With a high leverage, huge losses are also just as possible as huge gains. When you increase the potential for gains, you automatically increase your risk too. A small fluctuation in the price of currency on the higher side lets the investor multiply his investment . But the same movement downwards can wipe out his funds completely and leave him liable to pay the broker.
The forex market is open and active 24 hours a day. When trading ends in the US, other markets may just be opening for the day. Several traders across the world operate in the forex market and a combination of trades by many different traders can influence prices to a large extent.
Traders who are actively trading at any point of time react immediately to factors that can impact currency values. Unless you are trading at that moment, you cannot take advantage of the situation. This may leave you with an unsustainable currency pair position whose profitability has eroded overnight.
This is one disadvantage of the 24 hours trading in the forex market. There is no guarantee that the prices will remain at the same levels that you left them at when your trading day starts because trading is constantly going on elsewhere around the globe.
What affects the US economy may not have a significant impact on another economy. A decision taken on the basis of incomplete knowledge of a country’s economic situation can lead to disastrous results in forex. A thorough understanding of the political, geographic and economic factors of the country whose currency you are interested in is critical to success in forex. Without this, forex trading is an extremely risky affair.
A forex trade requires high maintenance. The investor needs to be updated on price, trends and changes at all times in order to take action to prevent losses. The market is purely speculative and time is money in forex trading. The investor cannot sit back for years or even months with a forex investment like he would after investing in the equity of a blue chip company. The Forex transaction requires hands on, constant tracking and high maintenance to remain lucrative.
The absence of regulation makes it difficult for an investor to get arbitration when disputes arise. There is no intermediary to help in settlement processes and issues. The trades are entered into by the two parties directly and the terms are negotiated by them. Although a formal contract is created, there is no structured channel for disputed deals to be managed or settled.
The deals are based largely on trust and it is the responsibility of the investor to ensure that he deals with an ethical and trustworthy party. Investors can opt for NFA registered brokers to make sure they have some recourse if the broker fails to fulfill obligations.
The possibility of huge gains and the lack of regulation makes the forex market a fertile ground for frauds of all sorts. Although the CFTC registration is a means of checking the credentials of a broker, it is up to the investor to make sure of these aspects and to keep a close eye on his forex trading account to ensure the safety of his funds.
The absence of an exchange brings uncertainty in the price of a currency. Different brokers may offer different bid and ask prices in the same market. A lot of effort and time needs to be invested in determining the right price in order to maximize gains. The uncertainty in price also makes predictions more complex and difficult.
Next Chapter: Why Trade in the Forex Market