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How to avoid risks in Forex currency trading

Author: Teddy

Foreign currency exchange, or so call FOREX, had become one of the best home businesses you can venture in nowadays. By trading foreign currencies thru Internet, theoretically now one can now make money at anywhere, anytime. For the new comers, Forex is the world largest trading market, yielding an average of $1.9 trillion daily turnover. As the majority who trade FOREX are speculators, FOREX is also well known as the most liquid trading available.

Nowadays, we are seeing increasing numbers of Forex investment opportunities as well as Forex traders in all over the world. As loses in Forex can be huge, it is best advise that beginners to learn about the risks involve in Forex trading.

Often we heard that getting started in Forex trading is easy and instant. All you need is a computer with Internet connection and a funded Forex account with foreign currency exchange broker. However, the hard part is who to open the Forex account with (meaning who should we appoint as our Forex dealer)?

Forex market is a non-centralized market. There is no common market place for Forex traders and there is no so-call 'standard' in foreign currency exchange price. Different Forex dealers offer very different deals to their customers. As an individual FX trader, you depends solely on the dealer to make a transaction in your trades, thus picking up the right dealer is extremely crucial in your risk.

How can a bad dealer cheat on your money?

Often a bad dealer is not totally scams. They are smart persons that trick money from traders that are not well-aware. These dealers, often known as retail market makers, will often encourage their clients to trade on margin and set stop loss orders, which allow the market makers to close out trades almost at will during busy markets at prices they have set. If the market maker does not offset the trader's position, the loss generated when a stop loss is triggered becomes the market maker's gain.

Trade prices are easily skewed one way or the other depending on the retail trader's position, which is known by the market maker. Traders can be encouraged to take risky positions just before major economic announcements. If all else fails, the market maker can quote extreme prices (known as spiking) to trigger stop loss orders while the client is at work or asleep. The vast majority of retail FX traders are not profitable. For those losing retail speculators, much of the funds they had on deposit will be, in some form or another, transferred to the market maker.

How can leveraging makes you lose money?

Leverage is the key for profiting in Forex. Forex dealers often allow their clients to trade with high margin. Margin trading refers to the leverage amount given to the traders to make purchase in the FOREX market. Typical FOREX margins can go up to 100 to 1 or even 200 to 1 where traders are given the power to buy 100 to 200 times more than what they can afford. With high leverage rates in Forex market, traders often find themselves controlling a big sum of money with a little cash put on the table.

Yes, margin trading might sounds attractive as 1,000 cash in a 200 to 1 margin rates account will have the power of purchasing currency worth $200,000. It magnifies the ROI of the trades with less money outlay on the table. But, as most experts say, leverage is a two way street. The brokers want you to use high leverage because that means more spread income because your position size determines the amount of spread income; the bigger the position the more spread income the broker earns. Not to forget the market does not always go in the direction you want, leveraging can magnifies your ROI in your Forex trade but it as well can turn your losses big.

Conclusion

As the article is meant for FOREX rookies, you probably are one of the rookies looking for the best way to get involved in the FOREX market? However, there is no quick answer for the question you are asking. Trading in FOREX is not as simple as it seen from outside. Especially there's margin involved in FOREX
trading, you might lose a lot of money in the beginning and learn your lessons in a hard way. Take all the time you need to learn this new trading skill well -- practice everything you learn with a demo account before you consider going 'live' with your own money. Seminars, eBooks, Internet, papers, as well as video courses are all your needs to get involved. I wish you good luck and good profit making in your FOREX trades.

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About the author: Teddy is an experienced writter and investors on the Internet. He suggest that beginners should always invest in their edcucation first before they invest in FX currency trading market. View more on his work at http://www.golearnforex.net

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