Forex Trading: Make certain that you know exactly what you are doing.
Although every investment involves an element of risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore, if you are considering participating in this market, you should be aware of some of the risks associated with any forex product so you can make an informed decision before investing.
The only money that you should use for playing the forex markets is money that you are prepared to lose. This is common sense, but so often, people get carried away with thh excitement of it all that they lose sight of this fundamental precept. There are also other reasons why forex trading may or may not be an appropriate investment for you.
The market could move against you
It is axiomatic that no one can predict which way exchange rates between currency pairs will go, and the foreign exchange markets can sometimes be very variable. Variations in the foreign exchange rate between the placing and the closing out of a particular trade will affect the price of your forex contract and the potential for profit or loss.
You could lose all of your investment
When you arrange to work through a broker, you will be asked to lodge a deposit (also called a margin) so that he can trade on your behalf. This deposit may be used to secure a forex position that is many time the amount of the deposit. This is called the leverage or gearing.
If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.
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There is no central marketplace
Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers dealing directly with each other. It is the forex broker himself who determines the execution price, so you are relying on the dealer’s integrity for a fair price.
You are relying on the broker’s reputation
You should be aware that retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. You should also be aware that customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer goes bankrupt.
You could become a victim of fraud
As with any investment,especially over the web you should always protect yourself from fraud. Beware of any forex system or scheme that promise significant returns with little or no risk. You should take a close and cautious look at the investment offer itself and keep a very close eye on any investment you do make.
The trading system could fail
If you are using an Internet-based or other forex trading system to do your trading, some part of the system could fail. If this should happen, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.
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