The risks of forex trading

We’ve mentioned throughout the program that forex trading carries a high level of risk. We’d like to take a minute to highlight some of those risks.

The market could move against you. Fluctuations in the foreign exchange rate between the time you place a 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. v

You could lose your entire investment. As mentioned earlier, leverage allows you to hold a large forex position with a relatively small amount of money. 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.

Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and may not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account may not be protected if the dealer goes bankrupt. Be wary of firms that say “Your investment is protected” or “Your funds are segregated.”

Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer to give you a fair price.

If you are using an Internet-based or other electronic system 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.

As with any investment, you should protect yourself against fraud. Over the last few years, there has been a sharp rise in foreign currency scams, and you should do as much due diligence as you can before trading forex.