Understanding the risks
Forex trading for profit is very risky.
For every person who gains a dollar from forex trading, someone else loses a dollar. And that's before taking into account costs and fees, which can be significant. Because changes in foreign exchange rates are often influenced by unexpected events, even highly experienced traders using specialist tools often get it wrong.
If you do choose to trade forex, you will need plenty of spare money to cover losses caused when exchange rates move against you.
Be wary of promotional offers for 'free' or 'no loss' trades
Especially from online platforms that may not be based in New Zealand. These often have strings attached, so examine their terms and conditions closely before committing.
Beware of forex trading ‘training’ and ‘tools’
You should be wary of anyone who tells you that a particular product or technique can give you access to better exchange rates or easy money. While software programmes and training courses can teach you how to make forex trades, no person or programme can ever accurately predict movement in foreign currencies.
Forex trading risk is hard to manage
Forex traders can use risk management techniques such as ‘stop-loss orders’ to try to limit trading losses. For example, if you agree to a stop loss order to automatically close your trade when the exchange rate reaches a specified level, in theory, this will cap the potential loss. But it would not be guaranteed, as stop orders may not work at all when there are extreme movements in the markets. You might also have to pay additional fees or costs to have a stop loss order in place.
Borrowing to trade is extremely risky
‘Leverage’ or ‘margin’ trading are terms used to describe ways of trading with borrowed money. This is like borrowing money to place a bet. You may pay only a small portion of the value of your trade up-front, but if you lose you will need to repay the full amount borrowed, plus any amount you’ve lost. This means that even small movements in currency values can have a big impact on any gains or losses you make through forex trading.