Risks of Forex Trading

Filed under: Forex Investing

All companies or individuals that perform part of their business in a different currency are subject to some Forex currency risks (or exchange rate risk or foreign exchange risk). These risks takes place whenever a company’s cost currency is different from its sale currency. On the other hand, whenever a company has revenues and expenses in the same currency, it doesn’t experience any exchange rate risk. The Forex market involves different types of risks including:  interest rate risk, credit risk, country risk, and Exchange rate risk.

Any investment is risky, but when it comes to trading off-exchange Forex contracts, risks are even much larger. Thus any potential investor must consider all the possible risks that might result from different decisions made for investing. The following section discusses the different risks of Forex trading:

The Scams

Forex scams were occurring very frequently few years ago. It is always essential to consider evaluating the broker’s background before signing up any documents. Authentic Forex brokers usually work with huge financial institutions such as banks, and insurance organizations. They are officially recorded with the government agencies.

Losing the whole Investment

Forex dealers ask investors to deposit an amount of money called the “security deposit” or “margin”, in order to purchase or sell an off-exchange Forex contract. The “gearing” or “leverage” enables investors to have a Forex position many times bigger than their actual account value, and with just a small amount of money. However, when prices fall, high leverage can cause investors huge losses relative to their first deposit. This is how an investor can attain huge loss through a small movement against his/her position.

The market is moving against you

It is never possible to forecast the movement of the exchange rates in the Forex market, due to the existence of fluctuations. Forex contracts, and future profits and losses are affected by the changes in the foreign exchange rate between the time the investor make the trade, and the time that he/she closes it.

Relying of the dealer’s dignity

In the retail off-exchange Forex market, there isn’t any main marketplace with many buyers and sellers. The execution price is decided by the Forex dealer, so investors must trust the dignity of the dealer for a fair price. Moreover, amounts deposited for Forex trading contracts are not assured and don’t have a priority during bankruptcies.

Trading system break down

Investors that use an electronic system for establishing trades may experience system failure. This might result in achieving huge losses of orders or order priority, because investors will not be able to insert, execute, modify, or cancel orders.

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