Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be substantial.
Therefore, if you are considering participating in this market, you should understand some of the risks associated with this product so you can make an informed decision before investing.
Forex trading carries a high level of risk and may not be suitable for all customers.
There are other reasons why forex trading may or may not be an appropriate investment for you, and they are…
- The Market Could Move Against You
No one can predict with certainty which way exchange rates will go, and the Forex market is volatile.
Fluctuations in the foreign exchange rate between the time you place the 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
You will be required to deposit an amount of money (often referred to as a “security deposit” or “margin”) with your forex dealer in order to BUY or SELL an off-exchange forex contract.
A relatively small amount of money can enable you to hold a forex position worth many times the account value.
This is referred to as LEVERAGE or GEARING.
The smaller the deposit in relation to the underlying value of the contract, the greater the leverage.
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.
- You Are Relying On The Dealer’s Creditworthiness And Reputation
Your dealer’s trades are not guaranteed by a clearing organization.
Furthermore, your dealer may commingle your funds with its own operating funds or use them for other purposes.
In the event your dealer declares bankruptcy, any funds the dealer is holding for you in addition to any amount owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor’s claim.
- There Is No Central Marketplace
Unlike regulated futures exchanges, in the retail off-exchange forex market, there is no central marketplace for many buyers and sellers.
The forex dealer determines the execution price, so you are relying on the DEALER’S INTEGRITY for a fair price.
- The Trading System Could Break Down
If you are using an Internet-based or other electronic systems 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.
Below are the examples om Forex Trading System
- You Could Be A Victim of Fraud
As with any investment, you should protect yourself from fraud.
Beware of investment schemes that promise significant returns with little risk.
You should take a close and cautious look at the investment offer itself and continue to monitor any investment you do make.