There has been a lot of information about Forex recently, and it seems, just as many claims that there is no risk involved with Forex trading. This is absolutely not true. As with any type of investment, there is the possibility of your investment, or trade, not working out in your favor. There are, however, numerous tools that traders use to help reduce the risks. But you must also educate yourself concerning the Forex as well.
Just as there are risks, there are also scams when it comes to Forex claims. Fortunately, most of these scams have been uncovered, but you must still use caution and good sense before you choose a Forex broker. Make sure that your broker is registered with the CFTC (Commodities Futures Trading Commission), or that they are a member of the National Futures Association (NFA). Check the broker out with your local Better Business Bureau as well, and insure that the broker has the backing of one or more large financial institutions.
Even if you have a good broker, there are still risks that you must consider. The Forex market can be volatile, and can change very quickly. The fluctuations in currency prices over a trading period, known as the Exchange Rate Risk, can literally ruin you in a matter of minutes if you don’t have a stop loss order in place. With a stop loss order, you can basically instruct your broker, ahead of time, to close an open position if the currency price drops to a certain level. You can also use limit orders to determine when an open position should be closed.
You must also be aware of other risks, such as the interest rate risk, the credit risk, and the country risk. The interest rate risks exists when there is a large difference between the interest rates in a currency pair. This difference can have a huge impact on expected profit or loss.
With the credit risk, you must be aware that when you are buying a currency, someone else is selling you that currency, and vice versa. There is always the possibility that the other party won’t honor the debt. The country risks relates to a situation when a government may try to control the available currency. Ideally, the major currencies are not at this type of risk, but the minor ones are.
Never doubt that Forex trading has risks, but also understand that there are ways that you can minimize your risk. Start by developing a trading strategy. Your strategy should tell you when to enter and exit the market. Of course, research and analysis are needed to develop a strategy. Also, as with any type of gamble – and investing is gambling – don’t invest money that you aren’t willing to lose.
You need to know how to read financial charts and quotes, and understand fundamental and technical analysis. Before you start investing, you need to learn these things, and learn as much about Forex as possible. Remember that even the best trader can only guess at what the market is going to do – there are no guarantees that all will go as you expect it to.
Learn to use risk minimizing tools, such as stop loss orders and limit orders. These types of orders are issued at the time that you make a trade, and it basically automates that trading. Your stop order can close your position when the price falls to a certain amount. A limit order can hold a buy until the price reaches a certain point.