Forex trading is a profitable business. Every profitable business also has numerous risks for those engaged in it. In forex trading, profits go hand in hand with losses. Thus, traders need to know the risks that they will face and how to get over them.
Forex risks need to be properly managed. Failure to properly manage forex risks may cause you to lose your full investment. Many forex traders have found themselves in this situation. Some traders have blown their accounts more than once. This makes them restart their journey with the benefit of hindsight.
To avoid these cycles, here are some risks you need to be aware of and how to handle them.
Trading Platform Risks
When you begin as a forex trader, one of the major things you should learn is how to trade. Trading takes place on an online forex trading platform. When you choose or are directed to a trading platform by your broker, you need to learn how to trade on it.
Forex brokers offer a demo account and a live trading account. Before you get to trade in the forex market, learn how to trade in a demo account. Learn how to analyze your chosen currency pair, how to place and exit a trade, how to fund and withdraw your profits among other profitable trading activities you need to know.
When you can’t work on a trading platform, it will be difficult to make a profit when you trade. Without trading platform knowledge and trading knowledge, you are at risk of losing all your investment.
These are risks that affect the forex market in totality. They cause the price fluctuations of currencies traded. Thus, systemic risks are important to traders. It is these price fluctuations that allow traders to make a profit. With price fluctuations, forex traders can thus try to predict the movement and profit from the movements.
There are several factors that cause these systemic risks. Political activities and economic announcements are some of the major factors. If there’s a drastic political or economic change in a country, this is likely to affect the value of their currency. Thus savvy forex traders find ways in which they can profit from such changes.
Inflation, unemployment levels, or changes in tax systems in countries also cause systemic risks in the forex market. Traders should research thoroughly the different currency pairs and make sure that they are not too exposed. So, in case of a sudden change, they don’t make too large a loss.
Liquidity risks are risks that occur when the market has more than enough or fewer buyers and sellers.
In a liquid market, it is easy for traders to fulfill their trading needs. You can buy and sell quickly, making a profit or loss. In an illiquid market, traders can’t buy or sell currency pairs affordably. In this case, brokers will have large spreads in their buying and selling prices, discouraging traders from the market.
A good way to handle liquidity risks is to look for a broker that offers fixed spreads or to avoid the market altogether.
Forex trading provides trades the ability to use leverage to take part in the larger market even when they have little capital. There are many leverage risks that traders expose themselves to when they use leverage to trade.
It is very easy for leverage to wipe out your account and leave you with debt to your broker. If you enter a position with leverage, and the trade doesn’t go as expected, you will make a larger loss. Otherwise, you will make an attractive profit.
There are many other risks that traders face in the market. As a trader, gaining knowledge of the market and online trading platforms ensures that you can keep and grow your capital. A good forex broker by your side is also an important partner as you trade.