Addressing the myths that surround Forex trading is like answering those unanswered questions of new traders. What is Forex Trading? Foreign currency trading or Forex Trading is the buy and sell of currency pairs in the Forex market. There are a lot of features of Forex trading and the market is a lot easier to manage compared to other major financial markets out there.
But that isn’t everything about Forex. There are also downsides to the bigger picture. As a matter of fact, the Forex market is riskier than commodities, equities, and futures markets. Why is that so?
The Risks of Forex Trading
One of the reasons why Forex trading is riskier than commodities, equities, and futures is that it is not centralized. There is no government authority that manages and facilitates the activities in the forex market. Also, the prices vary from one broker to another, and therefore, it is a decentralized market. Any person which has business aspirations can easily buy systems or provide services related to the market. These unsupervised activities resulted in scams and frauds by people who want to take advantage of the market. There are several brokers who tried to manipulate the prices and the risk of working with unregulated brokers remains.
Fortunately, those were all in the olden days. Nowadays, brokers that are regulated operate following a strict system and regulatory commissions are enforcing harsh protective measures to ensure the safety of Forex traders.
In the Forex market, although you will be required to pay the actual, full amount of the asset that you will be buying, you will hold a certain contract that will attest to your ownership. But in the Forex market, you don’t hold the asset and the broker holds the contract. So, if the time comes and the broker defaults, then theoretically speaking, you will lose the contract. Therefore, the safety of your money relies on the Forex broker, the very reason why you have to choose a regulated one.
Use Leverage Wisely
What is Forex trading leverage? An advantage that can turn into a disadvantage – leverage is something that mirrors gains and losses too. Nowadays, it is common to see brokers trying to give away huge leverage to investors which is enticing enough to grab in. There are countries that offer 50 to 1 security deposit that covers the possible losses that one might incur when trading.
But no matter how beneficial leverage can be, it is something that takes a lot of risks. Unfortunately, since it is highly available and easy to acquire, people tend to neglect it which soon results in losses and incidents happening so fast.
More importantly, one must remember and understand the 8 major currencies and how stable they are against each other. Trading a combo means that the pair must be balanced and stable. If there are changes in the value of these two pairs, it will most likely be very low. At the very least, it is 1% in a day. Therefore, when using leverage, use it wisely and responsibly.