Whether the Risk of Trading Forex

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.

• The market could move against you. Fluctuations in the foreign exchange rate between the time you place a 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. As mentioned earlier, leverage allows you to hold a large forex position with a relatively small amount of money. If the price moves in an unfavourable 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, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.
   
• 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 may not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account may not be protected if the dealer goes bankrupt. Be wary of firms that say “Your investment is protected” or “Your funds are segregated.”
   
• Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace. The forex dealer determines the execution price, so you are relying on the dealer to give you a fair price.
   
• 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.

As with any investment, you should protect yourself against fraud. Over the last few years, there has been a sharp rise in foreign currency scams, and you should do as much due diligence as you can before trading forex.
Here are some tips to help you avoid becoming a victim of a forex scam.

• Stay away from opportunities that sound too good to be true. In general, get-rich-quick schemes tend to be frauds. For example, avoid any forex company that predicts or guarantees large profits. If a company says that they will double or triple your money in one month or will guarantee a monthly return, walk away.
   
• Stay away from forex companies that promise little or no financial risk. There is no doubt that trading forex is risky, so if someone is telling you the opposite, they are not being truthful. Beware of forex companies that make the following types of statements: “Whichever way the market moves, you can’t lose” or “While there is risk, it is substantially outweighed by the reward.”
   
• Check the background of everyone you will be dealing with. If you cannot satisfy yourself that the persons are completely legitimate and above-board, the wisest course of action is to avoid trading through those companies.

A good place to start checking the background of a forex firm or individual is NFA’s Background Affiliation Status Information Center, or BASIC. It’s available through NFA’s Web site and contains the registration and disciplinary records for individuals and companies involved in the futures industry. Although some forex companies and brokers are not required to be registered with NFA, BASIC is a good place to start to determine if a broker or company has any past industry experience.

If you suspect any wrongdoing or improper business conduct in your forex account, you may contact or file a complaint with NFA by telephone at 800-621-3750 or online at www.nfa.futures.org.

You may also file a complaint with the Commodity Futures Trading Commission, a federal regulatory organization. The CFTC has prepared a questionnaire to assist the public in reporting suspicious activities or transactions. The questionnaire form is available on the CFTC’s Web site at www.cftc.gov. You can also transmit the form to the CFTC electronically or by mail to 1155 21st Street, N.W., Washington, D.C. 20581.

We hope you now have a better understanding of the off-exchange foreign currency market. The NFA brochure, “Trading in the Retail Off-Exchange Foreign Currency Market: What Investors Need to Know,” lists contact information for other regulatory bodies, as well as authorities you can turn to for additional information. This brochure is available on NFA's website.

Remember, however, that you should consult with your financial advisor and consider your financial situation and objectives before making any trading decisions.

If you have any questions about the material in this program, contact NFA’s Information Center toll-free at 800-621-3570.