Foreign exchange trading

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.

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 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.

‘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.

Forex trading using contracts linked to the exchange rate between two currencies is classed as trading a ‘derivative’ financial product. In New Zealand, individuals or businesses offering these contracts must hold a ‘derivatives issuer licence’ from us. See our list of all licensed providers.

We recommend New Zealanders avoid overseas forex trading services not licensed by us, even if they appear to be regulated by an overseas authority. Visit our warnings and alerts page for warnings about forex dealers.

Licensed derivatives providers must give you a product disclosure statement (PDS) before you trade with them. Different types of forex trading products involve different risks, so you should read the PDS carefully. In particular, you should look for information on:

• how the particular product you’re looking at works. If you don’t fully understand it, give it a miss. Remember that complexity usually means risk
• 'counterparty risk’ – the risk that the forex provider won't be able to fulfil its obligations to you if something goes wrong. For example, if your provider became insolvent, you may be an unsecured creditor and have difficulty getting your money back
• how they handle market risks such as lack of liquidity in the market, and trading delays. You may not be able to make trades when you'd like to
• fees and other charges
• information about leverage.