The Risks of Forex Signals Trading by FxPremiere.com News Group
Before Getting Started With Forex Trading
To avoid dealing with an unscrupulous forex brokers, choose a firm regulated by a government entity. In the U.S., look for brokers officially associated with the National Futures Association ( NFA ) or the Commodity Futures Trading Commission ( CFTC ). You can also verify a broker’s status by using Broker Check site, a service provided by the Financial Industry Regulatory Authority ( FINRA ).
As the Securities and Exchange Commission ( SEC ) warns, there’s no central repository that acts as a forex exchange and clears forex trades.4 This is in contrast to stock and options trading, so take caution. You’re still dealing with market makers on the other side of the trade who likely have access to more and better pricing information with their own interests in mind.
Much like the bid/ask spread in stocks, find brokers with low spreads, measured by pips. This is simply the difference between what you can buy and sell a currency for at one point in time.
If you’re a beginner, try to open an account with a broker who offers ample research and education services, such our partner Brokers. You might need to access basic information early and often. It’s nice to have it in-house, easily accessed inside your trading account.
Exchange Rate Risk
Forex traders use one country’s currency to purchase the currency of another country. Changes in the relative value of the two currencies can affect your profit or loss.
The International Trade Administration (ITA) describes this exchange rate risk at the company level amid a trade deal.
When you buy and sell currencies via foreign exchanges, you’re betting on how different countries’ currencies will change in value against one another. All else equal, if you purchase a currency that ends up increasing in value against the currency it’s paired with, you profit. If it decreases in value, you chalk up losses.
Exchange rate is linked closely to a country’s interest rate. Rising interest rates tend to attract investment in a country. Falling interest rates lead to disinvestment and a less valuable currency. Forex traders must pay attention to this relationship prior to heading into a trade, while managing one, and/or preparing to exit one.
We can divide country risk into two key categories. The first is straightforward: Instability in a country can impact its currency. When an adverse event occurs—or traders fear one might take place—investors often move their money out of a country’s currency, which has the effect of devaluing it. You don’t want to be on the wrong side of the trade when devaluation occurs. It can happen fast (i.e, amid political turmoil) and lead to illiquid markets. You run the risk of finding yourself holding the bag, so to speak, stuck in a trade.
Using leverage in fx trading isn’t all that different from using it with stocks and options. When you trade on margin, you borrow money from your broker to finance trades that require funds in excess of your actual cash balance. If your trade goes south, you might face a margin call, requiring cash in excess of your original investment to come back into compliance.
While leverage can exponentially increase profits, it can do the same with losses. Currency markets can be volatile—even small price shifts can trigger margin calls. If you’re heavily leveraged, you might face substantial losses. If you’re a novice trader, consider the major risks of trading on margin before borrowing from your broker.
Making money off the difference between the values of currencies—“foreign exchange” or “forex” trading—isn’t for the faint of heart. For one thing, there are no centralized markets like the stock exchanges to facilitate your trades. For another, the risks go well beyond an individual company’s, or an entire industry’s, performance. However, if you understand the risks, and trade conservatively, you can effectively trade currencies.
Here are the basics to get you started forex trading responsibly. Euro US Dollar (EUR USD) Exchange Rate
What Is Forex Trading?
In the simplest terms, “forex” refers to a foreign exchange where you trade one currency against another in pairs. For example, you’ll often see currency pairs that look like “USD/CAD.” We call this the dollar-loonie trade, swapping the U.S. dollar against the Canadian dollar.
In a trade, you can be “long” one currency at the same time as being “short” another. This means you make money when one price rises (long) or can make money when one price falls (short).
For example, if you’re long USD, you need the USD exchange rate to increase in order to profit on the trade. If you’re short CAD, you’d profit if CAD decreased in value against the USD. We call these exchange rate fluctuations percentage-in-point movement.
The Risks of Forex Trading
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The Risks of Forex Trading