The risks of forex trading

We’ve mentioned throughout the program that forex trading carries a high level of risk. We’d like to take a minute to highlight some of those risks.

• The market could move against you. Fluctuations 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 profit and losses relating to it.

• You could lose your entire investment. As mentioned earlier, leverage allows you to hold a large forex position with a relatively small amount of money. 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.

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 may not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account may not be protected if the dealer goes bankrupt. Be wary of firms that say “Your investment is protected” or “Your funds are segregated.”

Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer to give you a fair price.

If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, 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.

As with any investment, you should protect yourself against fraud. Over the last few years, there has been a sharp rise in foreign currency scams, and you should do as much due diligence as you can before trading forex.

Here are some tips to help you avoid becoming a victim of a forex scam.

• Stay away from opportunities that sound too good to be true. In general, get-rich-quick schemes tend to be frauds. For example, avoid any forex company that predicts or guarantees large profits. If a company says that they will double or triple your money in one month or will guarantee a monthly return, walk away.

• Stay away from forex companies that promise little or no financial risk. There is no doubt that trading forex is risky, so if someone is telling you the opposite, they are not being truthful. Beware of forex companies that make the following types of statements: “Whichever way the market moves, you can’t lose” or “While there is risk, it is substantially outweighed by the reward.”

Check the background of everyone you will be dealing with. If you cannot satisfy yourself that the persons are completely legitimate and above-board, the wisest course of action is to avoid trading through those companies.