Identifying Foreign Exchange Risks

Despite the claims of Forex being a very lucrative market, it is not risk free. As there are substantial sums of money involved, there is always a possibility that trades will go against you. But by identifying foreign exchange risks and using several trading tools, you can minimize your risks, and trade with caution.

Let us now identify forex risks which are common and you should be aware of.

The Frauds and Scams in Forex Exchange

Forex scams were very common unlit a few years ago. But the forex industry has cleaned up considerably since then. Still, it is important to be cautious check broker's background and credibility before signing up any documents with him. Remember that reliable brokers usually work with big financial institutions such as banks or insurance enterprises and are registered.

Risk of losing in Forex Exchange

The amount of money you deposit -"security deposit" or "margin", with your Forex dealer, whether small or big, can let you hold a Forex position many times bigger than the value of your account. This is known as "gearing" or "leverage". Identify forex risks behind the fact that the smaller the amount, greater is the leverage. In case the price moves against you, high leverage can bring you high losses compared to your first deposit.

Risk of the market moving against you

It's impossible to foresee the movement so the forex market as it is quite unsteady. Changes in the foreign exchange rate between the time you open the trade and the time you close can influence your forex contract and profits.

No main market place

As there is no main market place with lots of buyers and sellers, you have to rely totally on your dealer's honesty for a fair price. Knowing risks in currency exchange will always leave you well prepared and confident.

Depending on dealer’s reputation and credibility

If your dealer faces bankrupt, the funds deposited by you are not protected or insured. There's no surety for retail off-exchange Forex trades because of a clearing organization.

Risk of the trading system breaking down

If you are using a net-based or any electronic system for executing trades, there is always a possibility for a part of the system failing down. In that case, you may able to enter new orders, execute running orders, or alter or cancel orders that were entered before.

That's why once you decide to be the player in the forex market; you'd better realize the importance of identifying risks in forex to make suspended decisions before investing.