The business of buying and selling currencies, a.k.a. Forex trading, is a 50 billion dollar industry with over 100,000 retail traders worldwide. It’s also hazardous – so much so that it’s been called “the realm of sharks” by some financial professionals.
In this article, we’ll look at the riskiest elements in forex trading and what you can do to protect yourself against them. No matter how well you’re educated on Forex trading, there will always be an element of risk involved in it.
The market itself
While people like to talk about strategies and technical analysis as primary risks in forex trading (and they certainly are), you should never forget that the forex market is itself an entity that’s capable of causing immense damage to your portfolio. Combined with its exceptional liquidity, it makes it vulnerable to ‘black swan events like the Swiss National Bank (SNB) abandoning the floor against the Euro in January 2015.
With this kind of volatility, there’s no way you’d be able to predict if and when these events occur. Always keep your Forex trading capital protected by never exposing more than 5% of it on any single trade.
With so many retail Forex brokers flooding the market, it’s hard to know who’s legitimate and not. Brokers are incentivized by taking a cut of every trader’s losses which means that the $20,000 profit you made on trade won’t be $20,000 in your pocket – it’ll be $15,500 because they get $4,500 off the top it.
This kind of incentive structure creates a culture that’s ripe for abuse from brokers themselves who may choose to manipulate prices on their clients’ behalf or even illegally foreclose client accounts on the pretext of non-payment. As if this wasn’t enough to make you suspicious, there have been cases of broker insolvencies occurring with no warning whatsoever, resulting in traders losing all their capital and not being able to do anything about it.
The trading software
It may come as a surprise, but one of the most significant risks to your Forex trading account is the trading software you use to execute trades. It’s not unheard of to find brokers who offer free demo accounts but only allow a certain number of trades per month – after which they stop working.
In theory, this may sound like an excellent way to introduce newbies into the world of Forex trading, but in practice, it just ends up being another tool used by brokers to siphon money out of your bank account. To protect against this, always take screenshots of your open positions and keep track of how many times a day you’re ‘logged in’.
One group that deserves its category is the swarms of hard-selling fraudsters who prey on traders’ naivety. With so much conflicting information out there, it’s virtually impossible to trust any particular piece of advice, and this provides the perfect opportunity for scammers to take advantage.
Most common is the ‘signal service’, which promises an 80% win rate but, in reality, has a 90% loss ratio. These services also force you into only trading high-risk strategies like Martingale (1+1), Fibonacci (1+2) or moving averages because statistically speaking, there’s no such thing as a ‘safe’ strategy when it comes to Forex trading.
The bigger picture
These key risks certainly aren’t exhaustive, so remember that while learning how to trade currencies, it’s essential to focus on your daily returns and how they add up in the long run. If you’ve ever taken a look at the Forex market, you’ll find that most traders lose money in the long term because they don’t have an exit strategy.
Always have a stop-loss to limit your losses and never take more risk than you’re willing to lose. No matter how well educated on the topic, there will always be an element of risk involved in forex trading but if you want to minimize that, then remember these points.