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The most important risks of speculation in forex – Here!

As is known to all, risks accompany all transactions, and foreign exchange transactions are no exception. Investors need to learn about some foreign exchange knowledge when carrying out foreign exchange transactions, and the same is true for preventing risks. Only when having a good understanding of risks can a more smooth transaction be ensured. Today, risks of speculation in foreign exchange will be introduced.

Capital Security

The most important issue in transactions is the capital security. NFA clearly pointed out in the official publicity materials for OTC Foreign Exchange trading retail customers: OTC Foreign Exchange transaction is not guaranteed by the settlement institution, and customer’s deposit adopted for trading foreign exchange contracts will not protected by any regulatory authority, and will not be given priority in case of bankruptcy.

Even if the customer’s capital are deposited by the broker in a bank account with FDIC insurance, the customer’s capital will not be protected under the circumstance of the broker’s bankruptcy, even if RCM is registered and regulated by NFA and CFTC like Refco FX.

According to the American bankruptcy law, priority is given to dealing with claims made by stock customers or commodity customers, therefore, when brokers go bankrupt, they are quite likely to protect all their capital. However, since foreign exchange spot is neither stock nor commodity, foreign exchange spot customers are neither stock customers nor commodity customers.

Risk of the Market

The foreign exchange market is under the operation for 24 hours and there is no limit on its rise and fall. When there is fierce fluctuation, it is possible to finish the movement range that could only be achieved in a few months previously in a day. The trend of foreign exchange is influenced by many factors, and no one can accurately judge the trend of exchange rate. When holding a large amount, any unexpected exchange rate fluctuation may lead to a major loss or even complete loss of capital.

High Leverage Risk

Risks accompany all risks, however, due to the high capital leverage mode adopted in foreign exchange speculation, the amount of loss is enlarged. Especially in the case of high leverage, even if there is a small change contrary to your position, huge losses will be brought, the loss even cover all capital in the account opened. Therefore, the capital adopted for such speculative foreign exchange transactions must be risky capital; In other words, even if all these capital are lost, they will not have a significant impact on your life and finance.

Network transaction risk

Although there are backup telephone trading systems in most brokers,  foreign exchange speculation is mainly carried out on the Internet. Due to the characteristics of the Internet itself, it may be impossible to connect to the broker trading system. Under such circumstance, the customer may not be able to place an order or damage the existing amount, which will lead to unexpected losses. Brokers are exempt from liability, and they will not be responsible even if risks occur in the trading system.

Furthermore, as mentioned above, whether it is domestic real foreign exchange transaction or foreign exchange speculation, it is common that it is unable to connect to the transaction system of brokers for trading in certain specific periods (for example, when major data are released by the United States or when market prices fluctuate violently). Investors must be fully aware of this risk.

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