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Just a few years ago, the forex market was steeped in scams. However, the industry has made an effort to clean up its act but you should still exercise caution when signing up with a broker. Make sure you do some background check on your broker. Most reliable forex brokers are associated with large banks and / or insurance companies. In addition, the broker should be registered with the required government agencies.
In the US, forex brokers are usually registered with the Commodities Future Trading Commission (CFTC) or they are members of the National Futures Association (NFA). In case you have any misgivings about your broker, you can check with the local Consumer Protection Bureau or Better Business Bureau.
Besides the broker, there are other dangers of forex trading. Some of them are listed below:
Dangers of Forex Trading:
- Exchange Rate Risk -- Some times during the trading period, the currency prices fluctuate. If the prices fall very fast, the loss can be substantial unless you use stop loss orders. These orders allow your broker to close open position if the currency prices pass a predetermined level.
- Interest Rate Risk -- This can happen with there is a discrepancy between the interest rates in the two countries whose currencies you are trading. This discrepancy can result in either profit or loss on a transaction.
- Credit Risk -- There is constantly a risk or danger that the party who buys your currency might not honor his debt when the deal is closed. You can reduce the dangers associated with credit risk by dealing just with regulated exchanges where members are constantly monitored for their credit worthiness.
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