THE RISKS OF TRADING IN THE FOREX MARKET

Although every investment involves some risk, the risk of loss in
trading off-exchange forex contracts can be substantial. Therefore,
if you are considering participating in this market, you should
understand some of the risks associated with this product so you
can make an informed decision before investing.
As stated in the introduction to this booklet, off-exchange foreign
currency trading carries a high level of risk and may not be suitable
for all customers. The only funds that should ever be used to spec-
ulate in foreign currency trading, or any type of highly speculative
investment, are funds that represent risk capital – i.e., funds you
can afford to lose without affecting your financial situation. There
are other reasons why forex trading may or may not be an appro-
priate investment for you, and they are highlighted below.
The market could move against you
No one can predict with certainty which way exchange rates will
go, and the forex market is volatile. Fluctuations in the foreign
exchange rate between the time you place the trade and the time
you close it out will affect the price of your forex contract and the
potential profit and losses relating to it.
You could lose your entire investment
You will be required to deposit an amount of money (often referred
to as a “security deposit” or “margin”) with your forex dealer in
order to buy or sell an off-exchange forex contract. As discussed
earlier, a relatively small amount of money can enable you to hold a
forex position worth many times the account value. This is referred
to as leverage or gearing. The smaller the deposit in relation to the
underlying value of the contract, the greater the leverage.
If the price moves in an unfavorable direction, high leverage can
produce large losses in relation to your initial deposit. In fact, even
a small move against your position may result in a large loss, includ-
ing the loss of your entire deposit. Depending on your agreement
with your dealer, you may also be required to pay additional losses.
You are relying on the dealer’s
creditworthiness and reputation
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 dealer in
an FDIC-insured bank account are not protected if the dealer
goes bankrupt.
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. The forex dealer determines the execution price, so
you are relying on the dealer’s integrity for a fair price.
The trading system could break down
If you are using an Internet-based or other electronic system to place
trades, some part of the system could fail. In the event of a system
failure, it is possible that, for a certain time period, you may not be
able to enter new orders, execute existing orders, or modify or
cancel orders that were previously entered. A system failure may also
result in loss of orders or order priority.
You could be a victim of fraud
As with any investment, you should protect yourself from fraud.
Beware of investment schemes that promise significant returns
with little risk. You should take a close and cautious look at the
investment offer itself and continue to monitor any investment
you do make