For those not in the know, forex trading is the act of buying and selling currencies on the foreign exchange market. This is one of the most common forms of trading worldwide, but is it safe?
The truth is that forex trading has its risks. Even if you check the reliability and safety of the platforms you use and assess the trades you make carefully, you can lose money doing this. This article will cover the basic risks you need to be aware of.
What is Forex Trading?
As mentioned above, forex trading is the buying and selling of currencies. This is essentially a process of betting that one currency’s value will increase or decrease compared to the value of another. There are seven major currency pairs that are traded most often. They are:
- EUR/USD
- USD/JPY
- GBP/USD
- AUD/USD
- USD/CAD
- USD/CHF
- NZD/USD
The actual process of trading is simple, but that doesn’t mean making a profit is easy.
Four Risks to Consider Before Forex Trading
There are risks associated with every kind of trading and investment; some general, others unique to that kind of trading. These are the five risks you should be most aware of when considering forex trading as a way to make a profit.
Market Volatility
All trading is subject to market volatility, and the foreign exchange market can be heavily impacted by small changes. Exchange rates tend to rise and fall quickly and the changes can be dramatic. Furthermore, because forex trades are highly leveraged, you may be responsible for a much larger loss than you expect based on your initial investment.
Delayed Trading
Forex trading can be subject to delays because of lack of market liquidity, system problems, or execution risks. Delays like these can impact the profits or losses you make quite significantly if they hit at the wrong moment.
Trading Platform Insolvency
Forex providers are just as susceptible to insolvency as any company. If this happens, you are unlikely to recover your investment. As such, it is a good idea to research the companies you want to trade through carefully.
Fraud and Scams
There are scammers in most industries, and forex trading is no different. If a company seems to be making an offer that is too good to be true, it probably is. Do thorough research to ensure that the trading platforms you work with are reputable. Check third-party reviews to get an idea of what kind of service they provide.
Many of these risks cannot be completely removed, but you can mitigate them by doing thorough research and staying alert. When it comes down to trading strategies, learning is often a process of trial and error. That’s why it’s a good idea to start small. Never risk what you can’t afford to lose, especially when you lack the knowledge and experience to understand risk factors and how they can impact the market in real-time.
