Like any form of investment, forex trading involves risk. The currency markets can experience sharp fluctuations, just like the stock, bond or commodity markets. Therefore, investors interested in forex trading are encouraged to conduct their due diligence and/or consult an independent financial advisor before making any transactions.
In terms of specific risks, the forex market can present investors with less liquidity risk because of this particular market’s highly liquid nature. In other words, there is less risk that an investor will find himself unable to buy or sell a currency pair because he doesn’t have another market participant to take part in a transaction. Liquidity risk can increase around major news events.
It is also worth noting that there are some unscrupulous brokers out there. As a result, investors can benefit from performing substantial due diligence on any company they might work with. For starters, they should ensure the broker is registered with regulators such as National Futures Association in the US, the Financial Conduct Authority in the UK and/or the Australian Securities and Investments Commission in Australia. Additionally, investors might want to research the financial institution’s reputation and find out how long it has been in business.