If you are going to trade in foreign currencies (Forex), it’s important that you realize that this isn’t without risks. As a beginner you might lose sight of the risks; that’s normal, but what kind of risks are we talking about?
Keep in mind when trading Forex
- The exchange rate moves according to a steady pattern, but patterns are sometimes breached!
- Always use a stop loss, that way you will never lose more than you were willing to risk.
- Don’t use a high leverage, especially when you’re a beginner!
- Verify the reliability of the broker: does the broker have a license?
After the economic crisis, a lot of traders started looking for other ways to invest their money. Besides commodities a lot of traders found Forex to be an interesting investment. Trading foreign currencies comes with extra costs, every transaction you do comes with a fee. This fee isn’t that high, but can accumulate pretty heavily over time when you trade a lot in foreign currencies.
Risks of trading in foreign currencies
Trading in foreign currencies is better known as Forex. The most commonly traded Forex are the euro, American dollar, Pound, Japanese yen, Canadian dollar and the South African rand. A lot of traders paint a very positive picture when it comes to trading Forex, but in reality there are quite a lot of risks.
In a lot of cases, people use leverage to get a higher profit short-term. The bank will add nine pounds for every pound you put up, for example. If the price of that currency pair goes up ten cents, you make one pound. But keep in mind, you can also lose. Thus, if the currency pair goes down ten cents, you lose one pound.
Trading with leverage is a choice and not mandatory to make money with Forex.
Warning from the Authority for the Financial Markets
The financial supervisors advise traders to avoid risks by researching Forex trading. For a beginning trader it’s very important to know understand the risks. Check if the broker has the proper licenses before you start trading with a broker. You can check the register of the financial supervising agencies. A reliable broker always has a license from a financial watchdog.
On these websites you can also find a warning list. On this list you will find certain parties such as myprivatetrade.com, nordfx.com and youtradefx.com. It’s recommended that you avoid these parties.
It’s also very important that you realize that trading foreign currencies comes with no guarantees whatsoever. Previously achieved profits are in no way a guarantee of your success. If a broker giver prognoses of your investment returns, always check what these prognoses are based on; ask about negative scenarios and risks if the broker hasn’t made the sources of the prognoses available publicly.
As a simple rule of thumb, it’s wise to assume that with a higher profit also comes a higher level of risk. Always ask what the fees and costs are that you need to pay when you trade with a broker. Keep your costs low and your profits high!