Forex trading entails certain risks that differentiate it from other asset classes. Due to the nature of currency price fluctuations, traders rely on leverage and margin to execute larger trades and potentially generate profits.
While leverage can amplify gains, it also magnifies losses, sometimes exceeding the initial investment. If a currency experiences significant devaluation, traders using leverage may face margin calls, which can result in the forced sale of securities purchased with borrowed funds at a loss. Additionally, transaction costs can accumulate and erode potential profits.
It is important to note that the forex market is predominantly composed of skilled professional traders, and individual retail traders represent only a small portion of the global market (approximately 5.5%). The Securities and Exchange Commission warns about potential fraud and the presence of misleading information that may confuse inexperienced traders.
Moreover, statistics indicate that most retail traders struggle to achieve profitability in forex trading. According to CompareForexBrokers, on average, 71% of retail FX traders experience financial losses. Therefore, forex trading is often better suited for professionals with extensive knowledge and experience. It is worth mentioning that some major online brokers do not even offer forex trading services.
Considering these factors, it is prudent for individuals to carefully assess the risks involved and consider seeking professional guidance before engaging in forex trading activities.