There are a lot of great things about trading in the forex but there are a few, easy to understand forex risks inherent in trading in the off-exchange or “spot” forex market. While there is little that can be done to eliminate these risks being forewarned is forearmed and can help you manage expectations. The risks I am referring to typically fall into the two categories listed below. Make sure you understand what these risks mean before you make a trade in the forex.
1. Leveraged or “Geared” Products
Forex is a leveraged product. This leverage or gearing allows you to control a very large amount of currency with very little margin. This means that a very small movement in the market may result in a large loss in your account. Because forex trading is a leveraged product, it is possible to lose more than you have invested.
2. Risk Reduction Strategies May Have Limited Effect
While it is generally accepted to be a good practice to use stop losses, they are not guaranteed. If market conditions prevent a stop loss or stop limit order from being executed you could be liable for those additional losses. In addition, because trading the forex is a leveraged product you may lose more that your account balance and could be responsible for those additional losses.
1. Read the Risk Warnings
Consider these risks carefully and make sure that you understand them before you start trading. Take the time to read the risk disclosures and warnings provided by your dealer. Ask your dealer if you have questions about what you have read.
2. Get Educated
There is no satisfactory substitute for education. Make sure you have taken advantage of all the educational resources available to you. There are no shortcuts in this process and it will take some work and effort.