Forex Beginners: Learn About Risk in Forex Trading

Foreign currency exchange, often called forex, has become one of the best home businesses you can venture into these days. By trading foreign currencies through the Internet, theoretically now one can now make money anywhere, anytime. For the newcomers, 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 an increasing number of forex investment opportunities for forex traders all over the world. As losses in forex can be huge, it is advisable that beginners learn about the risks involved in forex trading.

Often we hear that getting started in Forex trading is easy and instant. All you need is a computer with an 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)?

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

How can a bad dealer cheat you out of your money?

Often what they do may not be considered a scam, but they are smart people that trick traders that are not well-informed. 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 make 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. Don't forget, the market does not always go in the direction you want. Leveraging can magnify your ROI in your Forex trade but it can magnify your losses as well.

Conclusion

As this article is meant for forex rookies, you are probably one of the beginners 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 seems from the outside. Especially when there is margin involved, you might lose a lot of money in the beginning and learn your lessons the 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 available to help you on your way. I wish you good luck and good profit making in your forex trades.