Online Forex Currency Trading Risks, Frauds and Scams
Every investment is risky but the risks of loss in trading off-exchange forex contracts are even bigger. That is why once you decide to be the player in this market; you had better realize the risks connected with this product to make suspended decisions before investing.
As with any form gambling, you should never bet more than you can afford to lose. However, the Forex market is is particularly volatile and very difficult to forecast. This means that there are high risks associated with trading foreign currency.
In forex, you are operating big sums of money, and it is always possible that a trade will turn against you. The Forex trader should know the tools of advantageous and careful trading and minimizing losses. It is possible to minimize the risk but no one can guarantee eliminating it.
Off-exchange foreign currency trading is a very risky business and may not be appropriate for all market players. The only funds that can be used for speculating in foreign currency trading or any kind of highly speculative investments are funds that represent risk capital (e.g. funds you can afford to risk without worsening your financial situation). There are other reasons why forex trading may or may not be a suitable investment.
Although longer term changes in foreign currencies tend to be gradual, currencies are sometimes subject to dramatic shifts over short periods of time.
It is this short-term volatility, combined with the fact that you trade on a margin, that exposes you to the very real risk that you could lose a lot more than you ever wanted to invest.
Although you can reduce your level of risk by using instruments like stop losses, diversifying your trades across a number of currencies and keeping your margins small, you need to be aware that Forex trading is a highly complex business and should not be undertaken lightly.
Online Forex Currency Trading Risks Types
There are risks with forex trading even if you work with a reliable broker. Transactions are unexpected and are up to unsteady markets and political events.
Interest Rate Risk is based on differences between the interest rates in the two countries represented by the currency pair in a forex quote.
Credit Risk is a possibility that one party in a forex transaction may not honor their indebtedness when the deal is closed. This can occur if a bank or financial institution goes bankrupt.
Country Risk is connected with governments that take part in foreign exchange markets by limiting the currency flow. The country risks more risk making transactions with "rare" foreign currencies than with currencies of big countries that let the free trading of their currency.
Exchange Rate Risk depends on the changes in prices of the currency during a trading period. Prices can go down quickly if stop loss orders are not used. There are several ways of minimizing risks. Each dealer should have a trading scheme. For example, one should know when to enter and exit the market, what kind of fluctuations to expect. The main rule every trader should stick to is:
"Don't use money that you can't afford to lose." The key to limiting risk is education, which is necessary for developing successful strategies.
Every forex trader should know at least the main things about technical analysis and reading financial charts. He should also know chart movements and indicators and understand the schemes of chart interpretation.
Stop-Loss Orders
Even the most experienced traders cannot foresee with absolute certainty how the market is going to change. Therefore, one should use these tools to limit losses during each forex transaction.
High Risk Investment
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
History of Online Forex Currency Trading Frauds and Scams
A few years ago, Forex scams were very usual but since then this business has cleaned up. However, it's wise to be cautious and to check broker's background before signing up any documents with him or her. Reliable forex brokers work with big financial institutions such as banks or insurance enterprises and are always registered with official government agencies. In the US, brokers should be registered with the Commodities Futures Trading Commission or should be a member of the National Futures Association. You can also check their background in your local Consumer Protection Bureau and the Better Business Bureau.
There is risk of losing your whole investment!
You will be asked to deposit an amount of money, called the "security deposit" or "margin, with your forex dealer in order to buy or sell an off-exchange forex contract. A small amount of money can let you hold a forex position many times bigger than the value of your account. This is called "gearing" or "leverage. The smaller the deposits related to the underlying value of the contract, the greater the leverage turns out to be. If the price moves in a non-preferable direction, high leverage can bring you large losses compared to your first deposit. That is how a small move against your position may become the reason for a large loss, and even the loss of your entire deposit. If it is noted in the contract with your dealer, you may also be required to pay extra-losses.
The market sometimes moves against you!
It is impossible to foresee, with a 100% guarantee, how exchange rates will move because the forex market is quite unsteady. Changes in the foreign exchange rate between the time you place the trade and the time you close it out influences the price of your forex contract and the future profit and losses related to it.
There is no main marketplace!
The forex dealer determines the execution price, so you are relying on the dealer's honesty for a fair price. As unlike adjusted futures exchanges, in the retail off-exchange forex market there is no main marketplace with lots of buyers and sellers.
You are relying on the dealer's reputation credit reliability
There is no guarantee for retail off-exchange forex trades because of a clearing organization. Besides funds deposited for trading forex contracts are not insured and never get a priority in case of bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer faces bankrupt.
There's a risk of the trading system break down!
Sometimes a part of the system fails, if you are using an Internet-based or any electronic system for executing trades. If the system does fail, it can happen when one may not be able to enter new orders, execute running orders, or alter or cancel orders that were entered before. The result of a system failure may be a loss of orders or order priority.
You can become a fraud victim!
Keep away from investment schemes that promise big profit with little risk. To defend your capital from fraud you should carefully examine the investment offer and go on monitoring any investment you make.
Trading Is Very Speculative and Risky
Trading CFDs and Spot FX Contracts is highly speculative, involves a significant risk of loss and is not suitable for all investors but only for those customers who:
a) understand and are willing to assume the economic, legal and other risks involved;
b) are experienced and knowledgeable about trading in derivatives and in underlying asset types; and
c) are financially able to assume losses significantly in excess of margin or deposits because investors may lose the total value of the contract not just the margin or the deposit.
Neither CFDs nor Spot FX Contracts are appropriate investments for retirement funds. CFD and FX transactions are among the riskiest types of investments and can result in large losses.
Customer represents, warrants and agrees that Customer understands these risks, is willing and able, financially and otherwise, to assume the risks of trading CFDs and Spot FX Contracts and that the loss of Customer’s entire Account balance will not change Customer’s lifestyle.
Risks Related to Long CFD positions, i.e. for Purchasers of CFDs
Being long in CFD means you are buying the CFDs on the market by speculating that the market price of the underlying will rise between the time of the purchase and sale. As owner of a long position, you will generally make a profit if the market price of the underlying rises whilst your CFD long position is open. On the contrary, you will generally suffer a loss, if the market price of the underlying falls whilst your CFD long position is open. Your potential loss may therefore be bigger than the initial margin deposited. In addition, you might suffer a loss due to the closing of your position, in case you do not have enough liquidity for the margin on your account in order to maintain your position open.
Risks Related to Short CFD positions, i.e. for Sellers of CFDs
Being short in CFD means you are selling the CFDs on the market by speculating that the market price of the underlying will fall between the time of the purchase and sale. As owner of a short position, you will generally make a profit if the market price of the underlying falls whilst your CFD short position is open. On the contrary, you will generally suffer a loss, if the market price of the underlying rises whilst your CFD short position is open. Your potential loss may therefore be bigger than the initial margin deposited. In addition, you might suffer a loss due to the close of your position, in case you do not have enough liquidity for the margin on your account in order to maintain your position open.
High Leverage And Low Margin Can Lead To Quick Losses
The high degree of “gearing” or “leverage” is a particular feature of both CFDs and Spot FX Contracts. The effect of leverage makes investing in CFDs riskier than investing in the underlying asset. This stems from the margining system applicable to CFDs which generally involves a small deposit relative to the size of the transaction, so that a relatively small price movement in the underlying asset can have a disproportionately dramatic effect on your trade. This can be both advantageous and disadvantageous. A small price movement in your favour can provide a high return on the deposit, however, a small price movement against you may result in significant losses which could exceed the money placed on deposit. Such losses can occur quickly. The greater the leverage, the greater the risk. The size of leverage therefore partly determines the result of the investment.
Margin Requirements
Customer must maintain the minimum margin requirement on their open positions at all times. It is Customer's responsibility to monitor his/her Account balance. Customer may receive a margin call to deposit additional cash if the margin in the account concerned is too low. Safecap has the right to liquidate any or all open positions whenever the minimum margin requirement is not maintained and this may result in Customer’s CFDs or Spot FX Contracts being closed at a loss for which you will be liable.
Spread
The difference between Our bid price and our ask price is “Our Spread”. Our Spreads are set in our absolute discretion, since we are acting as market maker, and any changes are effective immediately. Information in relation to Our Spread, leverage, rollover fees and trading hours for each Market is stated in CFD Trading Conditions and FX Trading Conditions pages of our website.
Cash Settlement
Customer understands that CFD and Spot FX Contracts can only be settled in cash and the difference between the buying and selling price partly determines the result of the investment.
Conflicts of Interest
Safecap is the counterparty to all Transactions entered into under the Customer Agreement and, as such, Safecap’s interests may be in conflict with yours. Our conflicts of interest policy is available at our website.
OTC Transactions
When trading CFDs or Spot FX Contracts with us, such transactions will not be executed on a recognized or designated investment exchange and are known as OTC transactions. All positions entered into with us must be closed with us and cannot be closed with any other entity. OTC transactions may involve greater risk than investing in on-exchange contracts because there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of the position arising from an OTC transaction or to assess the exposure to risk. Bid prices and ask prices may not be quoted by us, based on best execution policies applicable in the market. There is no central clearing and no guarantee by any other party of Safecap’s payment obligations to the Customer, thus Customer is exposed to credit risk with Safecap. Customer must look only to Safecap for performance of all contracts in Customer’s account and for return of any margin or collateral.
Prices, Margin And Valuations Are Set By Safecap And May Be Different From Prices Reported Elsewhere.
Safecap will provide prices to be used in trading, valuation of Customer positions and determination of Margin requirements in accordance with its Trading Policies and Procedures and Market Information Sheets . The performance of your CFD or Spot FX Contract will depend on the prices set by Safecap and market fluctuations in the underlying asset to which your contract relates. Each underlying asset therefore carries specific risks that affect the result of the CFD concerned.
Our prices for a given market are calculated by reference to the price of the relevant underlying asset which we obtain from third party external reference sources or exchanges. For our CFD and Spot FX Contracts, we obtain price data from wholesale market participants. Although Safecap expects that these prices will be reasonably related to prices available in the market, Safecap’s prices may vary from prices available to banks and other market participants. Safecap has considerable discretion in setting and collecting margin. Safecap is authorized to convert funds in Customer’s account for margin into and from such foreign currency at a rate of exchange determined by Safecap in its sole discretion on the basis of then-prevailing money market rates.
Rights to Underlying Assets
You have no rights or obligations in respect of the underlying instruments or assets relating to your CFDs or Spot FX Contracts. The Customer understands that CFDs can have different underlying assets, such as stocks, indices, currencies and commodities, as specified in CFD Trading Conditions and FX Trading Conditions pages of our website.
Currency Risk
Investing in Spot FX Contracts and CFDs with an underlying asset listed in a currency other than your base currency entails a currency risk, due to the fact that when the CFD or Spot FX Contract is settled in a currency other than your base currency, the value of your return may be affected by its conversion into the base currency.
One Click Trading And Immediate Execution
Safecap’s Online Trading System provides immediate transmission of Customer’s Order once Customer enters the notional amount and clicks “Buy/Sell.” This means that there is no opportunity to review the Order after clicking “Buy/Sell” and Market Orders cannot be cancelled or modified. This feature may be different from other trading systems you have used. Customer should utilize the Demo Trading System to become familiar with the Online Trading System before actually trading online with Safecap. Customer acknowledges and agrees that by using Safecap’s Online Trading System, Customer agrees to the one-click system and accepts the risk of this immediate transmission/execution feature.
Telephone Orders And Immediate Execution
Market Orders executed over the telephone through the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done” following Customer’s placing of an Order. Upon such confirmation of the telephone operator, Customer has bought or sold and cannot cancel the Market Order. By placing Market Orders through the Safecap Trading Desk, Customer acknowledges and agrees to such immediate execution and accepts the risk of this immediate execution feature.
Safecap Is Not An Adviser Or A Fiduciary To Customer
Where Safecap provides generic market recommendations, such generic recommendations do not constitute a personal recommendation or investment advice and have not considered any of your personal circumstances or your investment objectives, nor is it an offer to buy or sell, or the solicitation of an offer to buy or sell, any Foreign Exchange Contracts or Cross Currency Contracts. Each decision by Customer to enter into a CFD or Spot FX Contract with Safecap and each decision as to whether a transaction is appropriate or proper for Customer, is an independent decision made by the Customer. Safecap is not acting as an advisor or serving as a fiduciary to Customer. Customer agrees that Safecap has no fiduciary duty to Customer and no liability in connection with and is not responsible for any liabilities, claims, damages, costs and expenses, including attorneys’ fees, incurred in connection with Customer following Safecap’s generic trading recommendations or taking or not taking any action based upon any generic recommendation or information provided by Safecap.
Recommendations Are Not Guaranteed
The generic market recommendations provided by Safecap are based solely on the judgment of Safecap’s personnel and should be considered as such. Customer acknowledges that Customer enters into any Transactions relying on Customer’s own judgment. Any market recommendations provided are generic only and may or may not be consistent with the market positions or intentions of Safecap and/or its affiliates. The generic market recommendations of Safecap are based upon information believed to be reliable, but Safecap cannot and does not guarantee the accuracy or completeness thereof or represent that following such generic recommendations will reduce or eliminate the risk inherent in trading CFDs and/or Spot FX Contracts.
No Guarantees Of Profit
There are no guarantees of profit nor of avoiding losses when trading CFDs and Spot FX Contracts. Customer has received no such guarantees from Safecap or from any of its representatives. Customer is aware of the risks inherent in trading CFDs and Spot FX Contracts and is financially able to bear such risks and withstand any losses incurred.
Customer May Not Be Able To Close Open Positions
Due to market conditions which may cause any unusual and rapid market price fluctuations, or other circumstances, Safecap may be unable to close out Customer’s position at the price specified by Customer and the risk controls imposed by Safecap might not work and Customer agrees that Safecap will bear no liability for a failure to do so.
Internet Trading
When Customer trades online (via the internet), Safecap shall not be liable for any claims, losses, damages, costs or expenses, caused, directly or indirectly, by any malfunction, disruption or failure of any transmission, communication system, computer facility or trading software, whether belonging to Safecap, Customer, any exchange or any settlement or clearing system.
Telephone Orders
Safecap is not responsible for disruption, failure or malfunction of telephone facilities and does not guarantee its telephone availability. For the avoidance of doubt, Customer is aware that Safecap may not be reachable by telephone at all times. In such cases Customer shall place his/her order through other means offered by the Company.
Quoting Errors
Should a quoting error occur (including responses to Customer requests), Safecap is not liable for any resulting errors in account balances and reserves the right to make necessary corrections or adjustments to the relevant Account. Any dispute arising from such quoting errors will be resolved on the basis of the fair market value, as determined by Safecap in its sole discretion and acting in good faith, of the relevant market at the time such an error occurred. In cases where the prevailing market represents prices different from the prices Safecap has posted on our screen, Safecap will attempt, on a best efforts basis, to execute Transactions on or close to the prevailing market prices. These prevailing market prices will be the prices, which are ultimately reflected on the Customer statements. This may or may not adversely affect the Customer’s realized and unrealized gains and losses.
Compensation
Safecap participates in the Investor Compensation Fund for clients of investment firms regulated in the Republic of Cyprus. Customers will be entitled to compensation under the Investor Compensation Fund where we are unable to meet our duties and obligations arising from your claim. Any compensation provided to you by the Investor Compensation Fund shall not exceed twenty thousand Euro (20.000). This applies to your aggregate claims against us.
