The foreign exchange market, commonly known as the Forex, is a highly liquid, international market for trading currencies from all around the world that has gained popularity among traders, however, what new traders fail to recognize is that the Forex can be incredibly competitive with an inherently higher level of risk due to the amount of leverage and volatility involved. Currencies pairs don't have to move much for you to have a substantial loss and end up in a margin call or even worse, with a busted account. That is why it is important to fully understand what you are getting into and if you are new to trading it is best to just stay away and focus on learning to trade stocks.
A huge risk with trading the forex is leverage risk. Trading with leverage means you are borrowing money against the asset you are buying so you can increase your buying power and thus allowing you to buy more than you normally could have. This has the advantage of increasing your profits but can also magnify your losses above and beyond your account equity where you would then owe your broker money based on how much your negative account balance. With stocks, you can leverage four to one in a day trading account as a retail trader so with $25,000 in equity in your account you’ll be able to buy up to $100,000 in stock for the day. But with forex it is much greater and can be upwards of fifty times your initial investment. That is a lot of leverage and can be catastrophic to your account if you don’t manage your position correctly. Even when forex markets are relatively calm they can still cause large losses due to the increased leverage. This is one of the main reasons why new traders should avoid forex trading and instead focus on developing your skills trading stocks.
With forex trading you must pay attention to not just what policy makers are doing in your country but also the countries of the currencies you are trading. Interest rates can affect all markets but are dramatically magnified in forex markets as they play a huge role in the value of currencies, so whenever Fed speakers or central banks are out talking about interest rates from any country it is vital for you to be paying attention and if you don't have the resources or the time to sit and monitor global events like this, then you will be putting yourself at risk of losing a lot of money. Some other news that is necessary to monitor are the Gross Domestic Product (GDP), Industrial Production, Consumer Price Index (CPI) and, of course, Non-Farm Payrolls. All of these play a big role in the prices of currencies and need to be monitored carefully when trading.
As with trading any financial instrument, the broker's ability to stay operational is a huge concern when trading leveraged products. With Forex, it is especially important because if you are in a trade and the broker goes down you could be stuck with substantial losses if you’re not able to get out, which would be magnified because of the amount of leverage involved. The best way to avoid this type of risk is to find a broker that has a history of being stable with powerful technology and the ability to call in trades in case of an emergency.
Trading stocks has been the bread and butter market for many traders over the years and is where most start off due the amount of opportunities and ease of getting started. The stock market is full of opportunities with thousands of listed stocks while the forex only has a limited amount of currency pairs to choose from. There are also more brokers to choose from giving you the advantage of shopping for the one that best fits your needs with the most competitive commission rates.
Trading the Forex has plenty of opportunity but if you lack the experience, time and the right tools to trade it correctly, you are putting yourself at a major disadvantage that could lead to losing a lot of money with the possibility of blowing up your trading account. When you’re new to trading, it’s best to start off small and with stocks as they are less leveraged and not as volatile as the currency markets. This will provide you with more leeway for drawdowns while you are working on building up your account.