What Are the Dangers of FOREX Trading?

Buying and selling foreign currencies, also known as FOREX trading, is a risky and potentially lucrative investment practice; similar to stock investments FOREX trading can produce large gains but profit is not guaranteed.

Function

To make profit by FOREX trading, one buys a foreign currency, holds onto the currency in the hopes that it will appreciate relative to the home currency and then sells the currency back for a profit. If the currency does not appreciate, the buyer can lose money.

Time Frame

Similar to stock investments, FOREX trading can be conducted as a short-term or long-term investment. Sme traders buy and sell currency within the same day while other might plan on holding it for a year or two before selling.

Unpredictability

One of the major drawbacks of FOREX trading is that exchange rates can be unpredictable and may change as the result of unforeseen events, such as sudden political or economic changes.

Transaction Costs

Another drawback of FOREX trading is that transaction fees and imperfect exchange rates associated with buying as selling currency can sap profits.

Considerations

FOREX trading is a speculative practice that carries a high risk of losing money or being stuck with a foreign currency that is worth less than what you paid for it.

References

• Federal Reserve Bank of New York: Foreign Currency Exchange
• CNN Money: Foreign currency trading can be fool's gold; Clark Howard