In considering whether to trade in high risk over-the-counter or off-exchange currencies and currency forwards, options or derivatives where there exists a substantial amount of price volatility and financial leverage, you should read, understand, and seriously consider all of the following real risk factors which you are certain to encounter.
Trading in currencies and currency derivatives like options involves an extremely high degree of risk of loss, and is not suitable for many people. Investors can and frequently do lose all or part of the money they deposit. Because of the volatile nature of currency prices, the market price and, consequently, the value of your account can rise and fall sharply without notice. The use of leverage and/or options can substantially increase your risk of loss. Deposit only risk capital; in other words, funds you can readily afford to lose.
As the result of an adverse price movement, or other factors, you may sustain a total loss of your initial deposit and any additional funds that you deposit. You may also be subject to losses that exceed the amount deposited in your account when trading in certain leveraged products or short (opening sell) options. The use of leverage generally causes the value of your market position to change at a greater rate than that of the underlying asset, substantially increasing the risk of loss. Only the assumption of risk of loss gives rise to the opportunity to profit.
Option trading is a zero-sum game; for every dollar of profit there is an equal, opposite dollar of loss. Some studies have shown that more than eighty percent of small investors who trade options ultimately lose money. An option is an extremely complicated trading vehicle, which carries substantial risks that are not inherent to the trading of the underlying asset. For example, options lose value with the passage of time (time decay); options are generally not fully responsive to the price movement of the underlying asset (delta). Option profitability is substantially dependent on the exercise (strike) price of the option relative to the underlying market price. An option with a strike price which is deep out of the money is ordinarily unlikely to ever become profitable. Short (opening sell) options have unlimited risk; long (opening buy) options have risk that is limited to the amount of the premium plus commissions paid. You should familiarize yourself with the specific and systematic risks, terminology, and workings of long and short, call and put options before depositing money for options trading.
No trading system has ever been devised that can consistently produce profits. It is only the assumption of risk of loss that gives rise to the opportunity to profit. Some academics theorize that at any given time the current market price of a currency (or other liquid asset) reflects all known information about that currency, and any future price movement is an absolute uncertainty, completely random in nature (i.e., Random Walk Theory). Past price performance is not necessarily predictive of future results. The trade recommendations of brokers, traders, and analysts represent only their opinions and are normally insignificant in the face of the overall market.
Placing certain types of orders, such as stop loss or stop limit orders, which may be intended to limit the amount of loss, may not be effective because price movement or market conditions can make it impossible to execute such orders. Strategies utilizing spreads and/or straddles may have as much risk as simple long or short positions. It may be difficult or impossible to execute orders and offset or liquidate open market positions due to market liquidity and/or operations.
Commissions, bid/ask spreads and other transaction fees can have a substantial adverse effect on your market positions' ability to break even, and, therefore, your ultimate profitability or loss. In order for you to achieve a net profit on any transaction, the price received upon the sale of the market position must exceed the purchase price by at least the amount of any commissions and other fees paid. Trading currencies and/or options may involve frequent purchase and sale transactions, resulting in significant fees and commissions. Commission charges and other such fees increase the risk of loss and can account for all or part of trading losses. Generally, to calculate your breakeven price, total all commissions, bid/ask spreads and fees, divide by the unit quantity involved in the transaction, and then add the result to the buy price or subtract it from the sell price.
There is a risk associated with the solvency of the executing broker and/or marketmakers and/or the counterparty to your transactions, which frequently will be the executing broker. There is no governmental or private institution or party which regulates or assures performance on open positions in the over-the-counter currency market, nor is the brokerage firm, executing broker, marketmaker and/or counterparty to your positions insured against default or insolvency. You may face the risk of loss of unrealized gains in open position and all funds in your account due to the failure, inability or refusal to perform on currency or derivative transactions, or the insolvency, bankruptcy or liquidation of the executing broker firm, marketmaker or counterparty. Your customer intermediary and executing broker does not guarantee the credit worthiness of any third-person counter party. If you act as an option writer (short sell options) you risk unlimited market losses and unlimited credit risk; in other words, you could lose more than you deposit in your account.
Your account transactions are off-exchange and over-the-counter, made in international markets in many cases outside of the jurisdiction of your country and are not subject to your country's government regulation. Foreign markets may have regulations that differ significantly from those in the your country, and may afford substantially less customer protection. In some off-exchange currency or derivative product markets it may be difficult or impossible to liquidate an existing position, assess its value, determine its fair price, or evaluate the exposure to risk. No party, including your broker or the executing broker, is required to quote bid and offer prices on currencies or derivative products.
Significant conflicts of interest exist between you and the brokerage firm, clearing firm and marketmaker. For example, the clearing firm or executing broker may, and frequently will, act as counter party and take the other side of transactions you place for your account, while at the same time attempting to secure the best transaction price for itself. There is a conflict relating to the credit risk or worthiness of the counterparty to your transaction(s). A conflict exists because the brokerage firm and clearing firm stand to gain from increased trading activity in your account which generates increased brokerage commissions and/or clearing fees. Both the brokerage and clearing firms are free to engage in any currency or derivative transaction, capacity or activity that either deems appropriate, despite whether it may present an apparent, potential or actual conflict of interest with your account. The clearing firm is not your fiduciary and has no responsibility to act in your best interest except for trade execution and account cashiering.
Trading in off-exchange currencies or currency derivatives on an electronic trading system (ETS) may differ significantly from non-electronic trading environments. If you undertake transactions on an electronic trading system, you will be exposed to risks associated with the system, including the failure of hardware, software or infrastructure. The result of any system failure may be the immediate loss of communications and information, or an order placed by you is either not executed according to your instruction or is not executed at all, or data related to your open market positions or account information is irrevocably lost.
You should have sufficient knowledge and experience in financial and investment matters as to be capable of understanding and evaluating the risks and merits of trading in currencies and/or derivatives thereof. If you lack such knowledge and experience, or do not understand currencies or currency derivatives, you should seek the advice of a qualified attorney or trained financial advisor before depositing any money for trading purposes.
This brief statement cannot identify and disclose all of the risks and other significant aspects of trading in currencies and/or currency derivatives (like options). You should, therefore, carefully study and understand all aspects of the account, the market, and the trading vehicle, prior to depositing any money. If you do not understand any part of this Risk Disclosure Statement or the Customer Account Agreement, seek the advice of a qualified attorney or trained financial advisor.
You should carefully consider this statement about risk appropriateness and proportionality, because it could be interpreted that: 1) the amount of money you may be considering depositing in the currency and/or option trading account may be excessive relative to your net worth or annual income, or 2) based on your age, investment experience or personal circumstances, trading in currencies and/or derivatives like options may involve too high a risk of loss.
Trading of currencies and derivatives like options on currencies involves an extremely high degree of risk of loss and is inappropriate for many individuals. Some studies have shown that more than eighty percent of small investors who trade in options ultimately lose money. You could lose all or part of the money you trade. If you meet any of the criteria set forth above, or if you have pursued only conservative forms of investment in the past, you may wish to study the risks of loss involved in currency and option trading further before you deem it an appropriate vehicle for you, or you may decide it is entirely inappropriate and never trade.
If you decide to open a currency and/or option trading account be sure that the funds you intend to deposit are purely risk capital, in other words, money you can afford to lose. You should not deposit funds that if lost would jeopardize your lifestyle or substantially detract from your retirement program or other personal or family needs; and you should never deposit funds that have been borrowed.
Aggressive trading, and especially day trading, is an extremely high-risk strategy. Such trading generates substantial commission charges to your account. Due to such active trading, the commission charges relative to the funds deposited in your account may ultimately exceed what is considered normal or prudent in currency or options trading. Understand that such commission charges will increase your risk of loss and can account for all or part of trading losses. You must acknowledge these additional risks, which you are certain to encounter, before embarking on an aggressive trading strategy. Also, understand that it is you and only you who is control of, and responsible for, all trades executed in your account. Such a strategy requires that you review your account and any open market positions daily and report any discrepancy immediately.