Common Risks That Every Forex Trader Should Know
Forex market is know that is having the biggest trading volume in the world, which is why they are highly liquid assets. Forex trading has it is own part of challenges and taking risk at a certain degree is inevitable for a forex trader, an understanding of the dangers can help you avoid huge loses.
Bellow we are discussing about the common risks that every Forex trader should know and which factors play role.
#1 Leverage Risk
Leverage is known as margin which is important for conducting substantial foreign currency trades. However, due to slight fluctuations in price resulting in margin calls, the investor may have to pay an additional sum as margin. Using leverage very aggressively when market is volatile, can lead to losses through initial investments.
#2 Interest Rate Risk
When any given country’s interest rate goes up, international investors may look to increase their investment in the country. This means that the country’s currency will strengthen and higher return can be more likely. In contrast, if the interest rate drops, the currency will also depreciate which will result in more withdrawn investments.
#3 Country Risk
In developed countries, the currency exchange rates depend on a leading currency, such as the USD. In order to ensure that the exchange rate is maintained it means that the central bank of the country needs to have sufficient reserves. If there are frequent deficits in payments then the currency of the country will have significant devaluation.
#4 Transaction Risk
The risk is associated with the time differences between the different countries. It can take place sometime between the beginning and the end of the contract. There is a possibility that during a day (24-hours), exchange rates might change before settling a trade. The currencies may be traded at a different prices at different times during these trading hours. The longer time between the trade initiation and execution, the greater the risk. Fluctuations in exchange rate risk can expose traders to excessive trading costs.
#5 Counterparty Risk
The counterparty to the transaction may not be able to terminate the transaction. This default risk is called counterparty risk. This is especially happens in volatile markets as counterparties may or may not be able to perform their contracts.
Risk is inevitable. Time differences, volatility of leveraged trades, political issues, employment are few examples for big losses. However, when done right Forex trading can also bring great returns. However, if there is a trading plan and Forex is done right can bring great returns.