Forex Trading Involves High Risk and Requires Specialized Training
Investing in any investment vehicle creates the potential for reward, but only if you
have a tolerance level for the potential risks involved. During this year of
uncertainty, investors have frequently been looking over their proverbial
fences for greener pastures where higher returns might prevail. Their search
often leads them to the "fields" of alternative investing that may include a
variety of things from real estate and collectibles to commodities, options and
foreign currencies.
Hopefully, these investors have noted the rather large asterisk next to these that states
that each investment vehicle is imbued with a high-risk profile and that any
consideration of the foregoing should only be attempted after consulting a
financial adviser and receiving specialized training in the respective medium. If this "asterisk" is ignored, the uninformed soon learns how cruel a market
can be in delivering its form of justice.
One area that has grown enormously in popularity over the past five years due to its
inherent flexibility and easy access to sophisticated trading platforms has
been forex trading. For those forex traders that invested the time learning the craft from
professionals, practicing on free demo account systems, and exercising true
discipline under stress-filled trading situations, the path to financial
viability is visible, but success is anything but a sure thing. Knowledge and
experience take time, and the emotional psychology of trading must be dealt
with through careful planning and habitual execution of a detailed trading
plan.
Understanding the risks involved is a basic requirement, and here is a rundown on a few of
the risks that a forex trader may encounter:
- Fraudulent Brokers:
Most forex brokerage firms are legit, but the CFTC has prosecuted many fraudulent
ones. Offshore brokers may entice you with their claims, but stay onshore for
safety's sake. Brokers are also between you and the market and are prone to
manipulating spreads to their advantage;
- Software Salesmen:
No "Holy Grails" here, and if they had the perfect robot, then everyone would be using it;
- Trading System Purveyors:
No one has the "secret" either. If he did, why would he tell you and everyone else?
- Fund Managers:
Ever hear of Ponzi schemes or Bernie Madoff? Be extra careful before handing your capital over to
another party, more likely one you have never seen face-to-face;
- Trading Risk:
After fraud prevention, you now must deal with the vagaries of the market. You must invest the time practicing
on demo systems to develop the confidence and consistency that the forex market
demands. There are no shortcuts, unless you seek the guidance of a
professional trader and follow his advice to the letter. Markets move swiftly,
and your losing trades may outnumber your winners by 3 to 1. Loss minimization
techniques must be employed;
- Execution Risk:
Servers can get flooded, as can telephone facilities. You may want to sell, but cannot get
your order executed. Stop-loss orders were invented for these situations, but
check your broker's agreement. He may not guarantee stop-loss order execution
near data release dates or other special situations;
- Leverage Risk:
If you wish to magnify your losses, leverage will do that nicely for you.
Be extremely careful when your broker offers this service. He gains big time at your expense.
Mitigating risk is a time-consuming activity, but a very
necessary one if you want to live to trade another day. Risk only capital that
you can afford to lose, practice until your plan is habitual, and believe that
your patience will be rewarded at some point in time.
