Trading currencies in the foreign exchange (forex) market is a popular way to make money in the UK. A report from the Bank of England revealed that the trading volume of the British forex market reached an average daily turnover of 2.3 trillion GBP in 2021. Financial institutions, investors, and retail traders alike all contributed to the growth of the market.
Previously, financial institutions dominated forex. Today, thanks to the availability of online trading platforms, it has become easier for smaller retailers to participate in the market. Individuals don’t even need to have a lot of wealth to start — an FXCM overview of forex notes that retailers can trade currencies at low starting capital and affordable operational costs. The availability of leverage — arrangements that allow individuals to take trading positions using borrowed capital — can even amplify a trader’s profits.
Still, like any trading activity, forex is risky. Irresponsibility with leverage can cause huge losses. Failing to identify which brokers are reputable could lead you right into a scam. The following strategies can help you mitigate risk in forex, protecting your principal and your profits.
Learn how to spot scams
On the internet, many scammers pose as regular forex brokers and platforms, luring unwitting traders with seemingly useful advice and promises. It’s important to learn how to distinguish the fraudulent from the legitimate. According to NerdWallet’s guide to avoiding forex scams, unsolicited offers in which “brokers” contact you out of the blue are very likely to be scams. So are companies that offer unrealistic returns. If something seems too good to be true, it likely is.
NerdWallet also recommends registering under platforms that are regulated by the UK’s Financial Conduct Authority (FCA). Investments under FCA-authorised organisations will be protected under the Financial Services Compensation Scheme (FSCS), which is a safety net that provides traders compensation should the firm that holds their money ever collapse. Some well-known FCA-authorised platforms include eToro, FXCM, Pepperstone, and ThinkMarkets.
Practice with a demo account
One big advantage of forex is that you don’t have to stake any real capital to get hands-on practice. Most forex trading platforms will offer demo accounts, a kind of beginner account that enables users to trade virtual money under simulated market conditions. Beginner traders can demo accounts to test the effectiveness of their trading strategies. Since demo accounts aim to emulate real-world market conditions, how well you perform in a demo reflects how you would perform in real life. Use demo accounts to build confidence in your strategies before diving into real-world trading.
Be wise with leverage
When traders experience major losses in forex, irresponsibility with leverage is almost always to blame. Though leverage amplifies profits, it also amplifies losses.
Say you deposit 1000 GBP to trade a total of 10,000 GBP. If the leveraged trade made an overall profit of 15,000 GBP. The trader keeps the 1000 GBP deposit and pays back the 9,000 they borrowed. This leaves them with a profit of 5000 GBP. However, if the same trade only made a profit of 8,000, the trader would still have to pay back the 9,000 GBP they borrowed, netting them a 1,000 GBP loss.
Remember that the forex market is unpredictable. When trading on leverage, make sure to set aside money for possible losses. Don’t take on more leverage than you can handle.
Today, it is more imperative than ever to be careful with your money. According to research by KIS Finance, about 57% of adults in the United Kingdom said that they are struggling financially due to the rising costs of living. Inflation and financial turbulence due to the Russia-Ukraine conflict have left many markets unstable. So when entering a new trading venture, be sure to find ways to keep your money safe. With forex, that means spotting scams, being responsible with leverage, and making sure you get enough hands-on experience before staking real capital.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.