Lesson 2: The Benefits of Trading Forex and Market Participants

Risks Involved in Forex Trading

  • You can lose more than your initial deposit.
  • Forex trading – like any form of trading – is not without risk.
  • Some may even suggest that trading in the forex market actually carries above-average risk.
  • The one rule you must hold above all else is to trade only using your risk capital.
  • In other words, never trade more than you can afford to lose.

Leveraged trading carries a high degree of risk

Trading with leverage can be a profitable way to stretch your capital. As a trader, you can leverage the funds in your account and potentially generate larger profits relative to the amount you invest. But with this advantage comes the potential risk, because losses can also be greater than the total margin held. That’s why leverage is often called a double-edged sword. Both the upside and the downside can be significant. Given this, we’d like to make you aware of some of the risks involved with leveraged trading, because in our experience the best traders take steps to mitigate these risks.

  • Firstly, it’s important to know that you can potentially incur significant losses very quickly when trading on margin. If the market moves significantly and a sound risk management plan such as stop losses has not been put in place, losses could exceed the total amount invested.
  • Since traders can have multiple leveraged trades open concurrently, even seemingly small or low risk trades can add up when these positions are combined. If the market were to spike, crash or gap, it could result in significant losses for a highly-leveraged trading account.
  • At OANDA, we’re committed to keeping you informed about your open trade activity, but in the unfortunate event that your account drops below the minimum margin requirement, a margin closeout will occur. This happens so we can protect you from losing more money than you have in your account.

At OANDA, we are dedicated to your success, and we want you to realize the potential of leveraged trading, without exposing yourself to the risk.

Risks of trading multiple markets

Having a broad focus on potentially thousands of markets in the worlds’ global asset classes can lead to missing the best opportunities. This happens simply due to lack of focus. Let’s take a look at the potential risks associated with trading too many markets at the same time. It is worth considering a trade strategy that includes a narrowed focus to a few markets to monitor for suitable volatility.

  • Start with a shorter watch list of markets. It's possible, even for experienced traders, to miss market moves and become exposed to risk when watching many markets at the same time.
  • Creating a shorter watch list today of the most liquid and volatile markets with tight spreads would be a great place to start.

 

Risks associated with a Margin Close Out

When does a Margin Close Out happen?

  • If your account falls below 50% of the initial margin, all of your open positions will be immediately liquidated using the current fxTrade rates at the time of closing.
  • Margin Closeouts can help prevent the possibility of a loss exceeding your investment. But in fast moving markets, your losses can exceed your capital.
  • Having multiple trades open concurrently can increase the risk of a margin closeout due to an inability to follow many open positions simultaneously. 
  • A sudden or significant movement in one of your instruments may adversely affect your margin levels for your entire account.  
  • By reducing your account leverage you impose a higher margin requirement on each trade, which ultimately keeps you further away from a margin closeout.

 

Risk associated with Volatility and Liquidity

Market Volatility

  • Spreads fluctuate just like exchange rates. As a market maker, OANDA faces increased market risk periods of price volatility, such as economic and political news announcements. When volatility increases, our pricing engine widens our spreads accordingly. When volatility decreases, we narrow our spreads accordingly.

Liquidity

  • As a market maker, OANDA provides you liquidity even when pricing is not available to us from banks or other trading partners.
  • Global market liquidity changes throughout the day and reacts to news events, end-of-day rollover periods, and trading session openings. At times of scarce liquidity our partner banks act to limit their own risk. For example, they limit trade sizes, they may refuse to quote prices, or they provide “indicative quotes” which cannot be traded against.

Deal Only with Reputable Forex Brokers

  • Unfortunately, in the early days of online forex trading, fraud was an all-too common problem.
  • Great inroads have been made to clear out unscrupulous brokers, but you must still exercise caution when selecting a new broker.

Insist Upon Regulation

  • When reviewing a forex broker, insist upon regulation.
  • You should only trade with a broker that is a member in good standing with a recognized regulator such as those listed in the table below:


Reputable Forex Regulators by Country

Country Regulator
Australia Australian Securities and Investment Commission
United States Commodity Futures Trading Commission (CFTC)
National Futures Association (NFA)
Great Britain Financial Conduct Authority (FCA)
Japan Financial Services Agency (FSA)
Singapore Monetary Authority of Singapore (MAS)
Hong Kong Hong Kong Securities Futures Commission (SFC)
Canada Investment Industry Regulatory Association of Canada (IIROC)
New Zealand Financial Markets Authority


The Commodity Futures Trading Commission (CFTC) limits leverage available to retail forex traders in the United States to 50:1 on major currency pairs and 20:1 for all others. OANDA Asia Pacific offers maximum leverage of 50:1 on FX products and limits to leverage offered on CFDs apply. Maximum leverage for OANDA Canada clients is determined by IIROC and is subject to change. For more information refer to our regulatory and financial compliance section.

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

Trading FX and/or CFDs on margin is high risk and not suitable for everyone. Losses can exceed investment.