Forex Trading: Make certain that you know exactly what you’re doing.


Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore, if you are intending to get involvedwith this market, you should understand 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 goes without saying that no one can predict which way exchange rates between currency pairs will go, and the forex market can be volatile. Variations in the foreign exchange rate between the time you place a trade and the time you close it out will affect the price of your forex contract and the potential for profit or loss.

You could lose all of your investment
You will be required to deposit an amount of money (often referred to as a security deposit or margin) with your forex broker in so that you can buy or sell forex contracts. Because of the leverage involved, a relatively small amount of money can enable you to hold a trading position worth many times the account value. This is referred to as leverage or gearing. The smaller the deposit in relation to the underlying value of the contract, the greater the leverage.

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.

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 system 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, any deposit that you have lodged 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 broker in an FDIC-insured bank account are not protected if the broker goes bankrupt.

You could become a victim of fraud
As with any investment,especially over the web you should always protect yourself from fraud. Be very cautious about 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 continue to monitor any investment you do make.

The Trading System could break down
If you are using an Internet-based or other forex trading system to place trades, some part of the system could fail. In the event that this occurs, you could find yourself unable to close exposed positions. A system failure may also result in loss of orders or order priority.

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Categories : Forex Trading