Risks of trading foreign currencies
If you as a trader or investor are going to trade or invest in foreign currency it is important to realize that it involves many risks. As a novice investor you might sometimes overlook these risks. But what exactly include these risks?
Pay attention when trading Forex
- The exchange rate often moves in a fixed pattern, however, patterns can be broken!
- Always use a stop loss, that way you can never lose more than you were willing to risk.
- Do not use too high leverages, this is especially important for novice investors!
- Check the reliability of the broker: does the broker have a license?
After the financial crisis, many investors started looking for other ways to invest their money. Besides commodities, many investors found a very attractive new way of trading in Forex. Trading foreign currencies are always includes additional costs; transaction costs are charged for each transaction. Although these costs are low, especially in the short run, they could substantially mount up as one trades a lot in foreign currencies.
Trading foreign currencies is also called Foreign Exchange or Forex. The most common foreign currencies that are traded are the Euro, US dollar, Japanese yen, Canadian dollar and South African rand. Many traders often portray an optimistic picture of Forex trading, but in reality it certainly does involve some risks.
When you start trading Forex yourself you will discover the benefits but you will also find out that it involves certain risks. In many cases, the goal of Forex trading is to achieve high yields in the short run by means of a leverage. In that case the bank will for example increase each traded Euro with another nine Euro. If then the exchange rate of currency increases with ten cents, the trader actually makes one Euro. But of course the opposite is true as well, if the rate declines with ten cents, the trader loses one Euro.
Trading with leverage is a choice and is not absolutely required to make money with Forex.
Warning from Financial Markets Authority
The AFM advises traders to avoid risks and always do good research before trading in Forex. For the novice investor, it is important to know if they experience unnecessary risks. That’s why you should always consider first whether the provider has a good and valid license. This can be done by checking the AFM’s register; a reliable broker always has a license with a financial watchdog.
Besides, a security warning list available for traders looking for certainty. This list includes, among others, the following parties: myprivatetrade.com, nordfx.com, and youtradefx.com. The AFM recommends not to trade with any of these parties.
Moreover, as a Forex trader it is important to realize that guaranteed returns are not always guaranteed. Therefore, check for yourself what those projections are based upon, or ask for negative scenarios and risks if the broker does not indicate these herself.
Recall the general rule that a higher yield also entails a higher risk. Finally, always ask for the height of the transaction costs that need to be paid with each trade.