1. Forex scams. In recent years the industry has worked hard to put its house in order and nowadays Forex scams are certainly a lot less common than they once were. Nevertheless,they do still happen.



It is relatively easy to open a trading account, especially using the Internet, and a Forex scam is simply a case of a crook operating a website posing as a broker, inviting you to create an account and fund it and then vanishing without a trace.

To make sure that you are not caught out you must check out any broker very carefully prior to opening an account. Pick a broker who has an association with a major financial institution (for example, a bank or insurance company) and who is additionally registered as a broker. In the US brokers are either registered with the Commodities Futures Trading Commission (CFTC) or are a member of the National Futures Association (NFA).

2. Exchange Rates. One of the benefits of the Forex market is the fact that it can be extremely volatile with currencies moving a lot against one another in very short periods of time giving rise to rapid and substantial gains. The other side of this coin however is that the volatility in themarket also produces large and fast losses.

Fortunately traders do have tools available to limit this risk and novice traders should learn how to use these tools and ensure that they make full use of them each time they enter a trade.

3. Credit Risk. As there are always two parties (a seller and a buyer) taking part in each trade there is always a chance that one party will fail to honor his or her commitment once a deal is completed. Normally this occurs when a bank or other financial institution declares insolvency.

It is possible to lessen any credit risk considerably by trading only on regulated exchanges that insist on members being monitored to ensure their credit worthiness.

4. Interest Rates. Whenever you are trading any pair of currencies you have to watch for discrepancies between the interest rates in the two countries in question as any discrepancy can lead to a difference between the profit predicted and the profit which is actually received.

5. Country Risk. From time to time a government will intervene in the Forex markets in order to to limit the flow of its country's currency. It is unlikely that this will happen for a major world currency but might occur for less frequently traded minor currencies.

Of course, these are merely some of the risks of foreign exchange trading and novice traders will have to familiarize themselves with the others as they go along. Nevertheless, a good understanding of the 5 risks detailed here is essential before you enter the trading arena.