Forex trading has grown massively in popularity over the last few years but it’s still seen as gambling, or a very risky investment. On the flip side, some newbie traders are coming in to the markets assuming that forex is a safe market to trade. This begs the question, how safe is forex trading?
Forex trading is not safe, nor should it be considered safe. The market is extremely volatile and high leverages cause around 90% of traders to lose money. However, there are ways to reduce the risk of forex trading, such as risk management and only trading with regulated brokers.
How Safe Is Forex Trading?
Forex trading is by no means safe. In fact, it is incredibly risky and volatile. Many new traders coming into the markets have a false sense of security due to the perception that Forex is a “safe” market because it’s not regulated by any central governing body. However, this couldn’t be further from the truth, as Forex is actually one of the most risky and volatile markets available.
Forex trading can be risky due to many different factors, but by far the biggest reason that traders fail is because of high leverages. High leverages allow a trader to trade with as little as 10% of their account as margin for a trade, which means that you can control a trade worth 1 000 000 USD with only 100 000 USD in your account. This can be very dangerous, as it means that if the trader has poor risk management skills they could lose more than their entire account with just one single trade.
Around 90% of forex traders actually lose money and this is much higher than in other industries. For example, in casino gambling around 80% of gamblers lose money and only 20% break even. In the stock market, around 60-70% of traders lose money and between 30-40% manage to break even. This means that the forex market is by far the riskiest out of all these markets and it should be approached with a huge amount of caution.
The Risks Involved With Forex Trading
There are a huge amount of risks involving with forex trading and these equate to why around 90% of forex traders lose money in the markets…
Brokers Scamming Traders
A huge risk involved with forex trading is the forex brokers themselves. There are a huge amount of unregulated brokers and many of them are scammers. Brokers will offer bonus after bonus and then take it all back with trades that were not agreed upon by the client, or they’ll withdraw payments from their clients.
Brokers are completely in control of the prices you see on your charts and B-book brokers actively trade against their client base. To stay as safe as possible, you need to ensure that you’re trading with a regulated forex broker.
I’ve published a new article detailing how to spot a fake forex broker, which maybe worth a read if you’re in doubt!
High Levels Of Leverage
One of the biggest risks involved with forex trading is the high leverages of leverage offered by forex brokers. If you are trading with 100:1 leverage, that means you are risking 1% of your total account equity on each trade. So if you are 10,000 in the black, then a 1 pip movement would give or take 100 times more than your initial investment.
Leverage can enable traders to earn exponentially more money in the markets, but also lose their whole trading accounts in seconds. Traders should never risk more than 1% on any one trade and keep in mind that leverage can often be as high as 500:1 or 1000:1 with offshore brokers, so do not risk too much money per position.
Volatile Market Conditions
The forex market is extremely volatile and has the highest volume of any market, coming in at over 5 trillion dollars per day. This means that the larger players in the market have more of an influence on the price movements than some other markets. Due to this factor, it can be extremely hard for traders to predict where prices are going next and may risk lots of money on one trade only to see their position wiped out very quickly.
This effect is felt more on the lower time frames, where volatile price movements can take you out of trades extremely fast and you’ll experience slippage too. Swing traders and higher time frame traders avoid the brunt of this, but still feel it.
Lack Of Risk Management And Knowledge
The reason over 90% of forex traders lose money in the markets is because they have a lack of knowledge and a lack of risk management. This can include taking on too much risk (or leverage), holding losing trades for too long, entering at the wrong times and more.
Trying to make money in the markets without learning proper risk management or without further education is extremely hard. It takes years of experience before you’ll be able to consistently make good trades in the market, so expect to lose money in the beginning until you learn. This is why trading with a small deposit, or a demo account is a great way to get the fundamentals down.
How To Stay As Safe As Possible Whilst Trading Forex
Although forex trading itself is very risky, there are ways you can reduce the risk and stay as safe as possible.
Using Risk Management
The most important way to stay safe in the forex markets is to use proper risk management. Using proper risk management techniques will allow you to not take on too much risk with each position, losing all your account equity. Calculate your risk in a trade before even entering the trade.
By using the 1% rule, traders can ensure that they are only risking 1% of their account equity in any one trade. Even if they’re trading at 100:1 leverage, they’ll still be able to risk 1% of their account and not lose all of it. There are plenty of free resources online that teach you how to utilise proper risk management in your trades.
Stick To Low Leverage When Starting Out
One of the biggest ways to stay safe when forex trading is to start off using low leverage in your trades. Trading with high leverages is extremely risky, especially when you’re a new trader, so I’d recommend trading with between 5:1 and 50:1 leverage, no more.
Keeping your position sizes small means you can reduce your risk per trade to 1%, rather than the 100% that would happen if you traded at 1000:1 or higher. Higher leverages also mean slippage is more likely to occur too.
Backtesting Your Trading Strategy
To stay as safe as possible in the forex markets, you’ll want to backtest your trading strategy. Backtesting is a method of running your trades on past data, to test the profitability, drawdown and other important metrics. If traders bothered to backtest before ever touching the live markets, the majority of traders would realise that their strategies aren’t profitable at all.
There are a range of tools that make backtesting a much faster and easier process, so there’s no excuse!
The Importance Of Using A Regulated Forex Broker
One of the most important factors in staying safe trading forex is to use a regulated forex broker. Unfortunately, some forex brokers are not regulated, which means that they’re running a scam.
Therefore, always ensure that your forex broker is regulated by one of the following bodies:
There are more regulatory bodies for other countries but these are some of the main regulators in various major regions such as Europe and Australia. Every regulated broker will disclose their regulation before you sign up.
In Conclusion – Is Forex Trading Safe?
As demonstrated above, forex trading is by no means safe and is not suitable for everyone. To stay as safe as possible it’s crucial that traders don’t risk too much on any one trade (1% of equity or less per trade), use proper risk management techniques and trade with a regulated forex broker.
Although forex trading can be very risky, by using the above tips traders have a much higher chance of succeeding in the markets.
Are you thinking of trading forex? Let me know in the comments below!