Forex

maheshkarnam · #1 (**permalink**) 07-28-2008, 04:59 AM

Forex trading, just like most other forms of trading, carries risks and the novice Forex trader needs to be aware of these before dipping a toe into the
foreign exchange pond. Here we will consider the 5 most common risks of foreign currency trading.
1. Forex scams. In recent years the industry has done a great deal to put its house in order and today Forex scams are certainly far less common than
they used to be. They do however still exist.
It is fairly easy to open a Forex trading account, especially online, and a Forex scam in its simplest form is a case of a crook setting up a website
posing as a broker, inviting you to open an account and deposit money into it and then disappearing without trace.
To ensure that you do not get caught out check out any broker carefully before opening an account. Choose a broker who is associated with a major
financial institution (for example, a bank or insurance company) and who is also registered as a broker. In the United States brokers will be 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 attractions of the foreign exchange market is that it can be extremely volatile with currencies moving significantly
against each other in very short periods of time giving rise to fast and substantial gains. The other side of this coin however is that the market can also
produce substantial and rapid losses.
Fortunately there are tools available to the trader to limit this risk, such as stop loss orders, and novice traders need to familiarize themselves with
these tools and to ensure that they make full use of them whenever they enter a trade.
3. Credit Risk. Because there are two parties (a seller and a buyer) involved in every transaction there is a possibility that one party will fail to honor
his or her commitment once a deal is closed. This usually happens where a bank or financial institution declares insolvency.
You can reduce any credit risk considerably by trading only on regulated exchanges which require members to be monitored to ensure their credit
worthiness.
4. Interest Rates. When trading any pair of currencies traders need to watch for discrepancies between the underlying interest rates in the two
countries in question, as any discrepancy can result in a difference between the profit predicted and that which is actually received.
5. Country Risk. Occasionally a government will intervene in the foreign currency exchange markets to limit the flow of its country’s currency. It is
unlikely that this will happen in the case of a major world currency but could occur in the case of minor and less frequently traded currencies.

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