Is the Forex Market Riskier than Other Financial Markets?
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Putting aside a few myths and getting to the reality of the forex market
Spoiler alert – it’s absolutely not. There are plenty of features in the forex market which show that the market is relatively safer and more reliable and easier to manage risk in than other major financial markets.
Having said that, it’s also not one-sided. There are a few downsides in the forex market but in the big picture, the forex market provides more stability and more reliability in order to manage risk.
Let’s start with why the forex market is considered riskier than futures, equities, or commodities markets.
Yes, It Has A Risky Reputation, But…
The first claim that many critics make as to why it’s riskier, is because the forex market is not centralized.
Trading is not conducted under one governmental authority and since it’s a distributed market, prices may vary among from broker to broker. There’s no one authority managing the forex market.
Since the market is decentralized, anyone with business aspirations can buy systems and provide forex services to investors. A few years ago this resulted in many frauds and scams. Certain brokers manipulated prices and there was big risk in working with non regulated brokers.
Today, most brokers operating are regulated under a strict system, with all the major regulators providing very harsh enforcement of protective rules.
But the reputation that it’s not considered safer for investors still thrives. There are occasional events where brokers go bankrupt but these days, regulators protect funds and the deposits of investors.
If you purchase in the stock market, you own a tangible asset. In the forex market, you don’t actually hold the asset, only the contract. To repeat, this means that the broker holds the contract so if they default, you would theoretically lose the contract. When you choose a broker, make sure you choose one who adheres to the regulations of a developed country.
Use Leverage Wisely
Another aspect of the forex market that is considered a risk and brings with it a bad reputation, is leverage. In forex, it’s common to give away huge leverage in exchange for the money an investor invests. In many countries, it’s easy to receive 50 to 1 with a security deposit to cover the potential loss that may incur in your investments. It’s not actually for the holding of the assets (we’re buying contracts, not actually owning assets remember?).
It’s very easy to get very high leverage and the numbers can vary from 25 to 1, all the way to 4000 to 1.
For example, if you’re leveraged 100 to 1, it means that every 1/10 of percent change in price is actually 10% in money value worth of change. This can make very fast and high profits but at the same time, it’s 100% risk for loss.
Using high leverage involves taking a lot of risks. Because it’s available and easy to receive in the forex, people tend to take it and losses are unavoidable and incidentally happen very fast.
It’s important to understand that in the 8 major currencies, they are all stable in relation to each other. If you’re trading a combo, it’s a balanced and stable environment. Changes between the values of two pairs of any combos are usually very low. Less than 1% in a day.
If you don’t use leverage in forex and work consistently to take the bread and butter trades, you can add up daily wins into long term profits.
If you know how to protect yourself by working with a regulated broker and not using leverage, you’re well protected in the most stable financial market possible.
Other Stabilizing Features
There are more features that provide stability. One of them is that the forex market is the most liquidated market available. This means that if you have any orders placed in future prices, in most cases, you will receive that particular price. You’ll almost always fill your order at the price you want it.
In short, fast execution and feel for almost any price and large quantities are available in the forex market. This is a huge change from other markets.
Another stabilizing feature is that the forex market offers a 24 hours continuous market for 5 days a week. This gives you the opportunity to not get caught up in overnight gaps like you’d have in the futures or stock market.
You can place your orders anytime, at any price.
Selling Short, Sort Of
Last safety feature in the forex market is that there is always the possibility to invest the other way. In brief, to short sell.
Well, actually there is no such thing as shorting in the forex market.
Let’s say you want to short Eur/USD, so you’ll actually be buying the dollar and paying euro. This is short for buying the euro and selling USD. Since it’s commodity versus commodity, you can always go the other way around.
In the most advanced markets, short selling is available but in times of crisis, countries or the exchange management will limit the possibility of short selling.
If you only trade with regulated brokers, do not leverage, and make your investments only on the main economics which offer stability, the forex market is the safest investment environment. The high liquidity provided for any order at any price provides you with a huge advantage related to different financial markets like the stock or commodities exchange.
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