Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be large. So, if you are considering participating in this market, you should understand some of the risks associated with any forex product so you can make an informed decision before investing.

The only money that you should use for playing the forex markets is money that you are prepared to lose. This is common sense, but so often, people get carried away with thh excitement of it all that they lose sight of this fundamental precept. There are also other reasons why forex trading may or may not be an appropriate investment for you.

The market could move against you
It is axiomatic that no one can predict which way exchange rates between currency pairs will go, and the foreign exchange markets can sometimes be very variable. Variations in the foreign exchange rate between the placing and the closing out of a particular trade will affect the price of your forex contract and the potential for profit or loss.

You could lose your entire investment
When you arrange to work through a broker, you will be asked to lodge a deposit (also called a margin) so that he can trade on your behalf. This deposit may be used to secure a forex position that is many time the amount of the deposit. This is called the leverage or gearing.

If the price moves against you, high leverage can produce large losses compared to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.

There is no central marketplace
Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers dealing directly with each other. It is the forex system broker himself who determines the execution price, so you are relying on the dealer’s integrity for a fair price.

You are relying on the broker’s reputation
You should be aware that retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Even customer funds deposited by a broker in an FDIC-insured bank account are not protected if the broker goes bankrupt.

You could become a victim of fraud
As with any investment,particularly when you are doing business over the Internet you should always protect yourself from fraud. Be very cautious about of any forex system or scheme that promise significant returns with little or no risk. You should scrutinize the investment offer itself and continue to monitor any investment you do make.

The trading system could break down
If you are using an Internet-based or other forex bid placement system to place trades, some part of the system could fail. In the event that this occurs, you could find yourself unable to close exposed positions. A system failure may also result in loss of orders or order priority.

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