How Safe is Forex Trading?

How safe it is to trade forex is relatively easy to answer.  Basically, as a trader, you run a high risk if you decide to speculate on foreign exchange rates.  Hence, it is important to understand the risks involved in trading forex.

What are the fundamental risks involved in investing and speculating?

Before discussing the risks are of currency trading, let’s examine the fundamental risks that can exist when investing or speculating.  A distinction is made between the following four types of risk:

• Issuer risk
• Income risk
• Exchange rate risk
• Currency risk

The issuer risk is particularly important when investing in stocks and interest-bearing forms of investment.   Because of this, the respective issuer may become insolvent and you lose your money.  The risk of earnings is often closely related to the issuer risk, i.e., you will not receive the promised interest or that the earnings will be lower than calculated.  There are price and currency risks, particularly when trading securities, but also when trading forex.

The risks involved in forex trading

There is usually no issuer risk in foreign exchange trading.  This is because at least with brokers based in the EU or Switzerland, deposit protection applies to credit balances on the trading account.  Of course, this does not apply to exchange rates on which you have speculated and consequently wagered money.  There is of course always a return risk in forex trading in the form that you never know what profits you will make and whether a return can be achieved at all.  The risk, which is most notable in connection with foreign exchange trading, is the exchange rate risk.

Exchange rates can move in one direction or the other at any time so that with every speculation on exchange rates, you are simultaneously entering into a considerable exchange rate risk.  The currency risk is of course automatically present in forex trading.

Forex brokers are usually reputable and safe

The security of the provider has to be clearly differentiated from the risks that currency trading.  Most forex brokers are regulated, so regular monitoring and control take place by the responsible financial supervisory authorities.  Thus, forex trading is therefore relatively safe when it comes to the issuer risk mentioned above.

When choosing a forex broker based in the EU or Switzerland, statutory deposit insurance applies.  Of course, this does not mean that you cannot suffer any losses when trading forex, but the security in forex trading actually only refers to the seriousness of the forex broker who provides the trading platform and manages your trading account.

How Safe is Forex Trading?

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