Forex Risks and Benefits

Only recently, trading in forex, short for foreign exchange, was in the domain of large institutions and retail participation was not possible. However, the Internet and emergence of online trading platforms has changed all that. It is now possible for retail traders to trade in currencies through online brokerage accounts.

Forex is a highly fast-paced market where prices change every minute. However, daily currency fluctuations are very small, usually less than one percent in a day. To increase the value of small price movements, currency traders rely on the availability of enormous leverage that can be as much as 250:1. The fact that the forex market is highly liquid has made it possible for brokerages to offer high leverage as it addresses the issue of risk associated with it. The availability of leverage also makes it more volatile than it appears on paper.

Trading in currencies, just like trading in other financial markets, is a risky proposition. The very same leverage that increases the potential for profit for traders is responsible for huge gains turning into losses that can sometimes wipe out the major part of your account with the forex broker.

The forex market is also the largest financial market in the world involving large number of players dealing in larger amounts of money. Moreover, the currency market is open round the clock. It is thus important for beginners to understand that traders’ reaction to information released into the market is almost instant, which leads to constant movements in exchange rates of currency pairs. Although currencies do not move as sharply as stocks, the availability of leverage and the large size of individual contracts, makes forex trading as risky.