While it is easy to enter the forex trading market, making a profit and staying safe from risk isn’t as simple as you might initially think. Minimising potential mistakes and understanding forex trading risks should be at the top of your priority list.
It is crucial to acknowledge that while risk management will not guarantee that you avoid losses, it will help you harness a level of power to make greater profits and minimise the possible risks, keeping losses as low and recoverable as possible.
Understanding forex trading risks
As with anything involving finances, forex trading comes with substantial risks. In this article, we highlight the most common forex trading risks you as a trader should be aware of.
Exchange rates
The risk of an ever-changing exchange rate is something almost everyone has experienced in day-to-day life. It likely occurs for most when purchasing another country’s currency before an international holiday, travelling from the UK to Europe for example. Have you ever noticed that you can sometimes get more for your money? The amount you receive will relate to the current exchange rate.
As of today, the current exchange rate for the UK and Europe is (enter currency rate for UK/EUR on day of upload), which could change entirely tomorrow. In forex trading, you use one country’s currency to purchase another. Changes in the value of the two currencies can then affect your profit or potential loss.
This can change between the time the deal is complete and the time that you receive the payment. Without protection, a devaluation could cause you to lose money. Likewise, if the foreign currency increased in value, you would be subject to receiving additional profits. It’s a risk you should minimise with the best protection in place.
Economic changes in different countries
Unstable behaviour can hugely impact a country’s currency. Whether a significant event has occurred or traders have predicted one might happen shortly, investors are likely to move money from a currency, resulting in devaluation. This is something that can happen quickly and lead to damaging disasters.
Another way countries can cause trading risks is when a currency is devalued intentionally by the country itself to compete at a more effective rate in the trading market. This is not a huge risk but is something to consider when making decisions.
Margin and leverage risk
Leverage in forex trading requires a small initial investment called a margin. This allows traders to access more significant trades in foreign currencies, but overusing leverage can cause substantial losses.
When you trade on margin, you are essentially borrowing money from your broker that requires funds that exceed your current cash balance. If the trade doesn’t go as well as planned, you may be required to face a margin call, which calls for you to pay the excess of your original investment.
Leverage is a great tool that can increase profits but also aid losses. Even a slight shift in price can cause margin calls. With higher leverage comes a higher risk of loss. Consider the aftermath of trading on margin before borrowing.
Risking too much?
If you are new to trading, it is easy to feel tempted to make big moves. For any trader, it is essential to only risk trading what you can afford to lose. You should never risk more than 2% of capital on a single position, which keeps losses under control and easy to handle when the inevitable happens and limits traders from closing good trades out of fear.
Trading platforms
The right trading platform will support you with accessible news outlets, educational pieces, an easy-to-use trading platform, and access to any major or minor currency pairs you are considering.
Trading platforms that offer everything you need are essential to making the best trading decisions. A platform that doesn’t provide the fundamentals may not supply the dedicated support you need to educate yourself, limit risks and enhance profits.
Utilising a stop loss
The world of forex trading is volatile, and things can change in a matter of moments. A stop-loss is crucial to limiting an investor’s loss on a security position if any changes occur. It allows traders to relax more and not monitor holdings daily, considering how rapidly things can turn around.
Tips for better risk management
- Only trade money you do not need
- Keep your leverage low
- Avoid trading during or before predicted world announcements that affect the economy
- Set realistic goals
- Educate yourself about Forex risk and trading
- Use a stop loss
- Limit the use of leverage
- Have realistic expectations of profit and losses
- Implement a forex trading strategy
- Prepare for the worst
- Control your emotions when making trading decisions
- Diversify your Forex portfolio
Limit risks with forex trading
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