There are a great number of advantages of trading in the forex but there are a few, easy to understand risks inherent in trading within the off-exchange or “spot” forex market. Because there is little which can be done to get rid of these risks being forewarned is forearmed and that can help you manage expectations. The potential risks I am talking about typically fall into the 2 categories down the page. Ensure you understand what these risks mean before you make a trade when you look at the forex.
1. Leveraged or “Geared” Products
Forex is a leveraged product. This leverage or gearing enables you to control a tremendously wide range of currency with very little margin. Which means that a rather small movement available in the market may result in a sizable loss in your bank account. Because forex currency trading is a leveraged product, it is possible to lose more than you have invested.
2. Risk Reduction Strategies Might Have Limited Effect
While it is generally accepted to be a good practice to make use of stop losses, they’re not guaranteed. If market conditions prevent a stop loss or stop limit order from being executed you may be responsible for those added losses. In addition, because trading the forex is a leveraged product you might lose more that your account balance and could result in those additional losses.
1. Read the Risk Warnings
Examine these risks carefully and then make sure that you realize them prior to starting trading. Take the time to see the risk disclosures and warnings given by your dealer. Ask your dealer when you have questions regarding that which you have read.
2. Get Educated
There’s no satisfactory replacement for education. Ensure you have taken advantage of all of the educational resources open to you. There aren’t any shortcuts in this method and it’ll take some work and effort.