Top 5 Forex Risks Traders Should Consider

Trading is a delicate field, considering that no matter your expertise, some risk is always there.

According to the latest Triennial Central Bank Survey (2019), the daily trading volume on the FX market is around $6.6 trillion. Even though such numbers are impressive, the fact remains that the risks in this market are much higher.

Buying and selling of currencies can get out of hand if based on a wrong future assumption. So, knowing the most common risks when trading might help further investments. Keep reading to see the top 5 risks every forex trader should know.

The Potential Risks

As the market where currencies of the whole world get traded, risks are bound to show up.

Several conditions affect this situation and, if not considered, can have devastating results.

Nowadays, traders have developed a few strategies and tools to minimize the overall risk, but the trade market never allows complete control over it. One way is to use a forex brokerage comparison tool to help you find a suitable broker and work on averting risks.

The most common risk factors when forex trading is:

• Interest rate risk
• Leverage risk
• Exchange rate risk
• Country risk
• Transaction risk

Of course, many more could occur, but knowing these five would help a potential FX investor.

Interest Rate Risk

Forex prices are severely affected by the interest rate.

A basic rule in economics is that when an interest rate increases, the currency’s value goes together. And the opposite – the currency’s value will drop if the interest rate does too. They are parallel forces and are important to the country’s economy on a wider scale.

When a currency’s value goes up, investors buy, and when it goes down, they begin to withdraw their money.

Knowing the current interest rate of a currency and some of its past volatility can help when exchanging.

Leverage Risk

Usually, new investors are those who trade using leverage. Depositing a certain amount, called a margin, can enable the investor to trade in foreign currencies.

High leverage can profit the investor if played out right. But, if the market starts to decrease, the losses can get considerable. Even small price variations can create a margin call, i.e., it can end with you needing to pay an additional new margin.

Before trading with leverage, one should ensure that the market will benefit them rather than causing further complications and money loss.

Exchange Rate Risk

The demand and supply happening daily on the forex market, coupled with several other factors, can cause the currency’s value to variate, thus, creating an exchange rate risk.

Big companies are often directly connected and affected by the value of the exchange rate, especially if they do business outside of the country where they’re registered. But this goes both ways, as the profit a company makes can affect the exchange rate similarly.

In reality, all long-term investors will come to a point when they face an exchange rate fluctuation. Although unavoidable, it can be alleviated through hedging – a strategy to protect a trader’s position.

Country Risk

Politics are a major factor in the overall economy of a country, and the effects on a global scale are of sizable importance.

First and foremost, elections are an indistinguishable part of leading a country, and together with them comes the destabilization of the exchange rate. Even more, an unexpected election can shake the currency value to a further extension.

Protest and riots, unanticipated political events, and the instability of a political ruler go hand in hand with validation in the exchange rate. The ideology following the election plays a major role in the local and global economy.

Even though the country’s risk is at times hardest to handle, following the political news can help predict the upcoming imbalance in currency.

Transaction Risk

Transaction risks are correlated with the exchange rate risk. These are connected to the time difference set between the moment you purchase the currency and the moment the contract settles.

To simplify, forex trading operates 24 hours, giving enough time for the exchange rate to change. If, during this period, such a shift in value occurs, then you lose money. Hence, these possibilities represent a transaction risk.

Naturally, the bigger the time difference between the before-mentioned moments, the bigger the opportunity for this risk to arise.

An Overall Conclusion

Some of the risks you can face during trading can be prevented, yet there are always those that nobody expects.

Algorithms and systems minimize the loss, but you should always apply various strategies to help you do the same. Having basic knowledge about what risks could occur would set you straight on your path to increasing your income.

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