Risks in Forex Trading
Assuming you are dealing with a reputable broker, there are still a lot of risks in forex trading.
Forex transactions are subject to unexpected rate changes, volatile markets and political events.
Despite so many claims that you may see on most of the forex exchange web sites, there are lot of risks in forex trading. That is why, it is reccommended that you get forex trading training before you start.
Forex trading is done with substantial sums of money and there is always that possibility that trades will go against you. However, there are several trading tools, systems, strategies etc, that can help you manage risks in forex trading. With caution, and above all education and experience, the forex trader can learn how to trade profitably while minimizing losses.
Here are some of the general risks in forex trading
Scams: Forex trading scams were and is fairly common. You still need to exercise caution when signing up with a forex broker. Do some background checking – reputable forex brokers will be associated with large financial institutions like banks or insurance companies and they will be registered with the proper government agencies. In the United States brokers should be registered with the Commodities Futures Trading Commission (CFTC) or a member of the National Futures Association (NFA). You can also cross check with your local Consumer Protection Bureau and the Better Business Bureau.
Exchange Rate Risk: This refers to the fluctuations in currency prices over a particular trading period. Prices can fall rapidly resulting in substantial losses unless stop loss orders are used when trading forex. Stop loss orders specify that the open position should be closed if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate forex trading. Limit orders specify an open position should be closed at a specified profit target.
Interest Rate Risk: This type of risk can arise from discrepancies between the interest rates in the two countries represented by the currency pair in a forex quote. This discrepancy can result in variations from the expected profit or loss of a particular forex transaction.
Credit Risk:There is the possibility that one party in a forex transaction may not honor their debt when the deal is closed. This may happen when a bank or financial institution declares insolvency. Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness.
Country Risk: This type of risk is associated when government of a particular country becomes involved in foreign exchange market by limiting the flow of currency. There is more country risk associated with 'exotic' currencies, than with major countries that allows free trading of their currencies.
There are also various foreign exchange risk management strategies, that you can use to limit risks in forex trading.