Forex trading is so popular nowadays that everyone with a computer or even a tablet becomes attracted by the benefits and potential that it brings to their current incomes.
So, “how safe is forex trading?” The safety of forex trading depends on 3 factors: the traders, the risks involved, and the different regulators of trading platforms. If all 3 factors are examined and carefully dealt with, you can create a safe forex trading environment and invulnerable defense against trading malpractice. For your hard-earned capital, a safe trading environment with all 3 factors in check is the best protection for your trade.
This is highly advertised and marketed in different social media platforms that, most likely, everyone has heard about it.
These advertisements even go on to state that forex trading can be easy and hassle-free, leading almost anyone to start trading.
This statement may be true, but it lacks the underlying fact that forex trading with its benefits has high risks as well.
The high-level of security that authorities provide against scams will ensure the safety of your investment, but aside from regulatory bodies, trading can still be considered risky.
The risks fall short on your trading skills and the trading system’s risks.
The degree of safety is then better realized through becoming a better trader and through knowing the risks of your trading platforms.
This makes traders a critical asset of every substantial and secure trade.
If you want to achieve a stable and prominent career in trading while avoiding losses, one must first understand how to trade safely, and how to recognize risks.
How to Trade Safely?
1. Study Forex
Behind every great trade is a knowledgeable trader.
This means that to become a successful trader, your pure will and perseverance to trade won’t get you to earn better because doing the same thing over and over again doesn’t mean it works or will work.
Instead of perseverance in trading, you need tenacity.
The kind of tenacity that understands the trade and finds the best solution and approach to trading.
The difference is that it allows you to change and try different perspectives in trading to reach your goal.
Learn how forex trading can help you and how it functions by reading up articles about forex trading, making trades in forex, using active trading time, increasing safety in trades, and managing risks.
To be able to test out your learnings, several trading platforms provide a demo account to help you understand the trade better without losing a cent!
2. Set Trading Goals and Trading Plans
Trading is not a get rich scheme. You must set aside all prior expectations of forex trading, and understand that trading is not about how much someone earns.
it is how they can avoid losses. With this definition, we understand that trading does have losses, no great trader can avoid them.
The goal now is not only to earn but to become a better trader through time and experience.
You must understand the basics of forex trading and the market, and place great importance in the capital you start with to trade cautiously.
An even better way to achieve your goal in trading is to have a plan and stick with it. This plan can encompass all activities of your trade and help reduce losses in your part.
3. Match Goals with Strategy
The best strategy in forex trading is always the most proven one.
Great traders in different platforms have their own strategies that they either learn on their own or copy from others through time.
These strategies then allow them to become better traders with a better plan.
Usually most novice traders, because of their lack of knowledge, copy strategies from other traders to understand the market and field of trading better.
If you believe that your goals match perfectly with another experienced trader, then why not go for it and copy exactly the same strategy as theirs, it’s not like you can’t.
This strategy is called copy trading, and many traders use it because the traders they copy have higher experience, which allows the copiers to learn from them.
Trading is also a learning experience that allows everyone in due time to become better at it.
Traders can also help themselves by developing their own risk management strategies that fit their current system and goals. If these strategies are continuously applied and work at an advantage for these traders, the traders can further develop them.
4. Have a Reliable Broker
A reliable broker to help you trade is a great advantage to start safely in forex trading because they can provide current know-hows to accommodate you in making your trade.
Their experience will also increase the chances of profit and decrease probable losses in your part.
Illustration of different forex trading brokers
Hundreds of great brokers can fit your style of trading, but choosing from them requires extensive research before committing to one.
You have to look specifically at their trading profile to see if they match according to your goals and future activities, whether they are high risk-takers with huge earnings and losses, or consistent performers with balance earnings.
5. Start Trading with a Demo Account
A demo account is an important tool in some trading platforms that allows novice traders to practice trading.
This tool is a great approach to knowing first-hand the ins-and-outs of trading with a way to develop experience before live trading.
Most demo accounts act as a live trading system to match the actual trading system.
The simulation helps users learn the real costs of each trading decision. The different jargon involved in trading will also become more familiar, like the terms, currency pair, pip, margin, and leverage.
1. Never Risk it All
This is most applicable to all novice traders, who strongly believe in the quote “the greater the risk, the greater the reward.”
If you start forex trading, as I stated earlier, to earn big, then you are already at a loss.
Forex trading is a risk that shouldn’t ever require you to spend your entire savings into trading it all.
Many traders have even tried overtrading, which resulted in losing more money than in what they’ve started with. T
he two types are when traders trade too frequently or when they trade with a high amount.
Even if you’ve practiced trading with a demo account, the actual trading will differ because of factors beyond a demo account.
These factors include emotion and slippage, which can be understood in an actual trade.
2. Use Stop-loss
Stop-loss is a security measure placed on your investments to reduce a trader’s loss, by placing an order to your broker to sell a security when it reaches a certain limit.
The trade will immediately close, which allows you to stop losing anymore from that trade through the limit placed.
It is an important tool to protect your trade, especially when you aren’t constantly monitoring it.
Illustration of an investment that uses stop-loss.
3. Be Updated
The world of trade is constantly changing. Several factors can affect the markets and your stock’s value, so it becomes critical to subscribe to news outlets and keep updated to information regarding the market.
This will require quite a lot of your time, but the outcome becomes worth it and saves you from potential losses along the way.
There are two types of updated traders under this, which are the fundamental traders and technical traders.
Fundamental traders base their trade on political and financial news, while technical traders use approaches involving analysis tools like Fibonacci retracements to predict market data and charts.
Even with the different trading styles, both still require a quick-witted trader to understand the importance of pulling-out or placing a stock investment.
4. Evaluate Performance of your Trade
Trading is a constant activity that requires not only your capital but time and effort as well. Since we talked earlier about setting up a goal and plan, we must learn to execute them in sync with updated news and updated trading strategies.
It is a learning process where we should constantly monitor and evaluate our trade to know if they are working in our benefit or not.
4 Risks of Forex Trading
Firstly, forex trading is risky; if you enter the trading platform ignorant, then you will most likely lose before you’ve even begun trading. Knowing the different risks involved in forex trading will greatly help all traders in their investments. The following are the main risks involved in forex trading.
1. Country Risk
The currencies involved in forex trading are dependent, in all cases, to their country of origin.
The country’s standing heavily affects the value of the currencies being traded, whether its economic or geopolitical factors.
Assessing the stability of the country for the currency being exchanged should always be prioritized to avoid crucial factors that will create losses for your trade.
2. Leverage Risk
Leverage risks are disadvantageous during volatile market conditions and for long term trades.
This is because the value of the currency fluctuates greatly, leaving greater risks for the investments, especially for margins with high leverage.
3. Transaction Risk
This is a risk associated with the time in between it took to start the trade to the end of it.
Several factors affect this risk, which includes political and technical factors for the currencies being exchanged that causes a change in its price every minute.
4. Counterparty Risk
This is a risk created in a specific transaction that involves spot and forward trade contracts. These transactions are not completely guaranteed by the exchange value because of the unstable solvency of the capital and financial market.
The client is then subjected to counter-party risk where they will be unable or will not be allowed to create contracts with their respective banks.
Under counter-party risks, credit risk is associated because it refers to the probability of a high-level currency position to not be repaid as stated because of unforeseen action by a counter-party.
This risk is focused more on corporations, financial institutions, and banks and rarely occurs for individual traders.
This risk can also be mitigated and have only a small impact on traders when the trading platforms used are registered and regulated by the proper regulatory authorities. These authorities include CySEC, FCA, ASIC, and other forex market regulators from different jurisdictions.
Forex Market Regulators
Since the forex market is a very populated system with different types of traders and risks, it becomes essential to protect the people and the system that comprise it.
The rules and regulations placed in the forex markets are to ensure that the system and platforms of forex trading abide by the rules of safety and security.
This protects all parties included, which are the traders, brokers, and clients, to maintain the same standard and level of trading.
It is imperative that all traders, especially novice traders, check the regulators of a trading platform before beginning to trade.
The safety of your trade highly depends on knowing these details, because for some traders in foreign countries, this regulatory system becomes the only means to protect their investment.
Below are a few important and prominent regulators that aid to protect your investment in different trading platforms.
CySEC is a regulator in Cyprus that regularly updates its guidelines and rules to provide the best standard for forex trading platforms.
- They contain a new operating capital that requires its brokers to protect their client’s position to avoid market instability.
- Brokers are forced to send annual audit reports performed by third-party auditors to ensure the consistency of the platforms.
- Brokers are obligated to help their traders and protect them from bankruptcy through a minimum cash buffer of 3% of their trader’s funds under the protection of the Investor Compensation Fund.2.
The Financial Conduct Authority is based in the UK and is an esteemed forex regulator in the world of trading. They have an excellent system that prevents incompetent trading and protects its clients by promoting healthy trading with a trusted system of brokers.
- They ensure that all relevant authorities and authorized markets function well through constant supervision, monitoring, and enforcement.
- They are obligated to provide client protection by securing an appropriate degree of safety and protection from risks involved in different types of investments and transactions.
- They are in charge of maintaining effective and consistent trading systems that adhere to general rules and policies enacted by them.
- They ensure that all trading platforms under them should exercise their functions with transparency for their client’s safety.
The Financial Sector Conduct Authority is based in South Africa and is the sole regulator of all their financial activities and services. They have the goal of improving financial markets and brokers by having ethical and just treatment of their clients. It also offers its brokers financial education and seminars to maintain the integrity and stability of them.
- They have the “Financial Intelligence Centre Act 38 of 2001,” which protects its clients from money laundering, financial terrorists, and unusual or suspicious transaction reports.
- They also have “Financial Markets Act, 2012,” which requires market structures to establish an effective governance system that enacts appropriate measures and policies to avoid conflict of interest and malpractice.
- Their latest policy is “Insurance Act 18 of 2017,” which provides a legal framework that regulates and supervises the market and brokers in line with the Constitution of the Republic of South Africa.
- They too have many other policies and acts that protect the FSCA regulated traders and brokers.
The Securities Commission of the Bahamas is tasked to supervise and regulate investment funds, safety and security of clients, and the capital markets in the Bahamas. Their main goal is to maintain a safe and knowledgeable trading system in their area by educating and enforcing policies and security laws on trading and investing.
- Under their “Securities Industry Act, s.12” the functions are:
- They ensure just and equitable trading by overseeing capital markets and brokers.
- They are the advisors of the Minister in matters over financial markets and capital investments.
- They promote and educate the public on capital markets and its advantages, disadvantages, and risks involved in dealing with them.
- They create a clear and just field of trading to facilitate orderly growth of capital markets.
- Under their “Financial and Corporate Services Providers Act, 2000,” the functions are:
- They examine and conduct evaluations of the business of the licensee for compliance with the policies.
- They maintain a general analysis of the services and activities made within the platform for the safety of its clients.
The Australian Securities and Investment Commissions is a regulatory body based in Australia. They are a renowned regulatory body because of their strict audits and compliance policies, which makes it attractive for traders who requisite safety for their investments.
- They are under the “Australian Securities and Investment Commission Act of 2001,” which holds them responsible to uphold legislation guidelines and executing it towards all brokers under them.
- They have a huge forex market with great potential for their traders and investors to trade in a well-protected market.
- They have focused guidelines and regulatory framework in comparison to other regulatory bodies.
- They ensure that traders are given the freedom and avoid imposing too much trading restrictions while still under the protection of the regulatory body.
- They contain a wide reach of protection to all its clients by flagging down all brokers who conduct malpractice and financial fraud.