The Risks of Trading in the Over-The-Counter Forex Market

Every investment involves some risk but the risk of loss in over-the-counter forex trading can be important. If considering participating in this market, knowing the answers for “what is forex trading” are far enough. A forex trader should understand some of the risks that are related to forex. This will be a guide to decide before investing.

Over-the-counter forex trading has a high-level risk and might not be suitable for all traders. Funds that represent risk capital or those that can be afforded to lose without affecting financial situation are the only funds that should be used to speculate in foreign currency trading.

The following are the risk of trading in the forex market:

1.  Market direction could be against the trader

The forex market is volatile. No one can predict with certainty in what direction the exchange rates will go. The price of the forex contract and the potential profit and losses relating to it can be affected by the fluctuations in the forex rate between the time the trade is a place and the time it is closed.

2.  A possibility to lose the entire investment

It is required to deposit an amount of money (referred to as “security deposit” or margin) to the forex dealer to trade (buy or sell) an over-the-counter forex contract. A relatively small amount of money allows the trader to hold a forex position that is worth many times the account value. This is called leverage or gearing. The smaller the deposit in relation to the value of the contract, the greater the leverage.

High leverage can result in large losses in relation to the initial deposit when the price direction is unfavorable. Even a small move against the position may result in a large loss including the loss of the entire deposit. Paying additional losses may be required to pay depending on the agreement with the dealer.

3.  The trader is relying on the dealer’s creditworthiness and reputation

A clearing organization does not guarantee the dealer’s trades. The dealer may blend the trader’s fund with its own funds or use them for its own interest. Any funds the dealer is holding for the trader may be treated as an unsecured creditor’s claim.

4.  No central market

The retail over-the-counter forex market has no central marketplace with many buyers and sellers, unlike the regulated futures exchange. Since the forex dealer determines the execution price, the trader is relying on the integrity of the dealer for a fair price.

5.  Trading system could fall

Some parts of the system could fail so it is a drawback for those who are using internet-based or electronic systems to place trades. In the event of a down system, there is a possibility for a certain time that the trader cannot place a new order, execute existing orders, or modify or cancel orders that have been entered. System failure might also lead to loss of orders or order priority.

6.  Trader can be a fraud victim

In any type of investment, one should know how to protect themselves from fraud. Beware of investment schemes the claim to have significant returns with little risk. Take a close and cautious look at the investment offer itself and continue to monitor any investment that has been made.

The answer to “what is forex trading” is just the beginning. There is a lot more to explore especially that trading in any instrument involves real money.

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