Top 4 Forex Trading Risks And How To Avoid Them
Are you interested in forex trading? If you haven’t done any research about it here’s some basic information you should know.
Forex or foreign exchange is when one currency is traded for another, so trading it should be by pair. For instance, when you see EUR/USD, it means that the exchange of currency is Euro against US dollars.
As of 2020, around $7.5 trillion are traded per day. But why is there foreign exchange? The top reason for that is because of commerce, tourism, and profit. Forex is one of the most active and popular assets around the world.
How does the forex market work?
The forex market facilitates the buying and selling of different currencies worldwide. Similar to other underlying assets, forex aims to gain profit. And since it’s an active market, there’s also a wide range of choices to trade.
Forex trading works by predicting the if the value of one currency will increase against the other. That’s why traders should keep monitoring and researching to keep tabs on the movement of the currencies.
If you want to know how to trade forex and its risks, don’t hesitate to check the list below!
1. National currency risks
Since investing leans more on the speculative side, there are instances when an investor withdraws their assets, which makes the currency of a certain country look less attractive. This instance may greatly affect the exchange rate.
In terms of the currencies of developing countries, they usually rely on the country with the highest rates, such as the USD. That’s why these developing countries should have sufficient balance in their national banks.
When you trade forex and you pick an unstable currency, it can have a great impact on the currency. If you get stuck in this situation, and the devaluation occurs, you’ll know why it’s a risky kind to trade.
2. Exchange rate risk
As mentioned, exchange rates should be monitored regularly due to their volatility. When you trade forex, you should know the factors affecting the movement of the market, such as inflation.
Since the exchange rate is volatile, it’s recommended to always look out and stay updated on whether the currencies you’re aiming to trade are profitable or not.
As you know, forex trading is about the exchange of two currencies, so you should watch out for both sides. Some traders watch out for the country’s interest rate to determine whether there’s a possible loss or not. As a beginner, you should also try this method and see if it works.
3. Market risk
According to experts, market risk is the most helpful among all other forex trading risks. Since the forex market can be affected by everything around it, the currency rate can easily change. And with the constant price change, traders use the opportunities to take advantage of the change when buying or selling.
Basically, you can make a profit when trading along with market risk. So if you find risks to be intimidating, keep in mind that there are risks you can use to create a great profile and more money.
4. Transaction risk
As you may know, there’s a risk when you enter a contract and the time you sell it which is called the transaction risk. This risk is associated with time, so the longer the time difference, the higher the chance that the exchange to fluctuate.
For instance, if the trading time is long, there’s a lot of chance that the exchange rate changes. And sometimes, before the trade settles, there are unexpected changes that might happen.
Some of the most possible transaction risks that might happen are handling order confirmation and communication. When that happens, you can still receive some compensation, but not as big as if you’ve won the trade.
How to minimise risks?
As you may already know, you can still encounter risks whether you trade forex or other financial instruments. However, there are ways in which you can avoid these risks.
Choose a credible broker
Beginners and even professional traders need to find a broker to trade with. However, even if there are many brokers around the world, finding the best can still take time and effort.
You can start by looking at the top brokers online. Then, find more information about them, including reviews and past clients. When you see their past clients, try to get to know why they left.
But aside from the comments from their clients, you should also check their platform and see if they offer everything you need to trade. Besides, sometimes, even when you find the most-trusted broker in the world, you might still not be compatible with each other.
Start at small trades
As a beginner, you shouldn’t trade too much. Even if you think you’re ready since you’ve traded well using your demo account, it’s still not guaranteed that you’ll also do well in the live trade.
Besides, you shouldn’t expect to make a profit on your first trades, so there’s no point in trading all the money you saved.
Plan your trade well
Are you starting to create your trading plan? It’s fine if you don’t have a detailed plan. As long as you have an overview of your target, you can still trade your way to becoming a professional.
Come up with a strategy
While coming up with a plan, you should also create your forex trading strategy. Of course, you must first know how to trade forex. From there, you can formulate a strategy based on your schedule, knowledge, and other factors you should consider when trading forex.
Whether you’re planning to trade forex or not, it’s best if you know the risks. Besides, sometimes, knowing the risks can give you an idea of whether you would like to try it or not. Lastly, forex is an interesting thing to trade, so every trader should try it at least once.
We hope this article helps you get to know forex trading more. Don’t forget to share your thought on forex trading by leaving a comment below!
ABOUT THE AUTHOR:
Aliana Baraquio is a web content writer at FP MARKETS, a global Financial Technology services Foreign Exchange (Forex) and Contracts for Differences (CFD) broker established in 2005. She also loves reading about interior design and home makeovers.
