Forex Trading Risks

Is Forex Trading Legal?

Forex (a contraction of ‘foreign exchange,’ often abbreviated as FX) is the market in which investors trade currencies. The forex market is the largest, most liquid market in the world in terms of the total amount of cash traded. The average daily sums measure in the trillions of dollars. It includes every currency in the world. So is forex trading legit? Yes, but unlicensed and unregistered forex trading sites are not. Their professional-looking online platforms make these forex trading scams look so legitimate even though they are not. 

When trading forex, a seller agrees to pay a buyer the difference between the current value of an asset and its value at a specified contract time. In the event the difference turns out to be negative, the buyer pays the seller. People, businesses and governments can all be forex sellers or forex buyers. 

There is no single central forex market. Investors trade over the counter in all major financial centres. These include Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich. Besides those specific cities, countries with growing forex markets include Bulgaria, China, Malta, Romania, Russia, and the Arabian Gulf states. Unfortunately, some of them also host forex trading scams.

Not surprisingly, bankers, investors and speculators trade the U.S. dollar more than any other currency. They most frequently exchange it for euros, followed by the yen, the pound sterling, and the Swiss franc. Slight market fluctuations are responsible for profit or loss. These typically result from a combination of short-term speculation, major economic indicators and interest rate differentials.

Forex trading, of course, is a considered a type of investment. You may win. But  a trader cannot chargeback forex in the event of a loss over the counter. 

How Does Forex Trading Work?

Forex transactions take place either on a ‘spot’ (immediate) or a ‘forward’ (later) basis. The definition of ‘spot’ is two business days for most currency pairs. Those two days exclude weekends and legal holidays in the countries that issue the relevant currencies. Brokers can schedule forward trades by agreement at any time in the future, other than a weekend or holiday. A forward trade will take into consideration the interest rate differential between the two currencies. Transactions that mature more than a year later are relatively unusual, but possible. In any case, investors in forward trades exchange funds not on the day of the transaction but rather on the settlement date. 

A ‘future’ is similar to a forward. But to execute one a trader must specify the amount in advance, schedule it on a specific date and use an exchange. The buyer pays a portion of the value of the contract up front and either pays or receives money based on the change in value. Speculators are the most common traders of futures. Contracts are usually closed out before maturity.

What Are the Advantages of Forex Trading?

• Forex provides an option for every budget and every investor with a different appetite for risk taking
• Transaction costs are extremely low compared to other types of trading
• The forex market operates 24 hours a day, seven days a week, closing only for major national holidays
• Information regarding forex markets is easily accessible and simple to understand
• The global forex market is so huge that no country, central bank or single investor can corner the market or rig prices for an extended period of time

What Are the Disadvantages of Forex Trading?

• Time differences between major financial centres around the world can affect exchange rates
• Individual traders should use algorithms to protect the value of their investments when they are sleeping, in transit or otherwise indisposed
• A relatively small adjustment in the price of a contract may yield immediate and substantial losses in excess of the amount invested
• Changes in the forex market are usually small, unless they are ‘leveraged’ through low margin deposits or trade collateral

What Are the Risks of Forex Trading?

• The other party to the transaction may not have the intention or the ability to honour a contract
• Sudden unexpected news (catastrophic weather or earthquakes, for example) usually affect the market
• There is almost no government regulation, so investors have few, if any, protections
• Traders may lose all of their investment in a matter of minutes, even before deducting brokerage commissions, if they place highly leveraged bets

How Safe Is Forex Trading Online?

Forex trading by retail investors is not legal everywhere. Some countries permit it, many restrict it and others ban it outright. Therefore, investors should check with their national financial regulator what the legal status of retail trading is in their country and what restrictions may apply.

In any event, always confirm that any financial or investment firm you are considering is not the subject of a scam warning issued by a regulator, professional association or consumer protection agency, especially if it operates online. That is the surest way to avoid forex trading scams.

If you have a complex transaction dispute with an unregulated forex brokerage, challenging them can be very complex and mistakes can cost you. MyChargeBack analyses your case and assists you throughout the entire recovery process.