Foreign exchange market is the financial market which allows traders to buy and sell currency pairs. They can trade in these currencies with the available market exchange rate.
The market is volatile and prices keep changing frequently due to uncertainties. To make good trades and avoid the risks of the market, it becomes necessary to know risks involved in forex trading and learn how they can avoid them.
Five Common Risks of Forex Trading
In the forex market, traders have to face volatility risks. It makes it difficult for traders to earn from their trades and enjoy successful trading. The market has a low success rate of 5% to 10% with millions of active traders daily.
Therefore, know the risks and avoid them for profitable trading:
In forex trading, traders with less funds often take the facility of leverage. Leverage is the loan that forex brokers provide to help traders open high market positions. They can open higher positions and earn double profits.
However, they need to predict correctly and make the right decision. It will be a high loss for traders if they fail. They have to pay brokers and also lose their funds.
The transaction risk is related to the contract of trading. Parties get into contracts with a settlement and commencement date. The price of currency they trade changes with the time which is why they have transaction risk.
Traders have to analyse and study the market well before trading in futures or options contracts of forex trades for such reasons.
Interest Rate Risk
Interest rates have an effect on the country’s exchange rate. When the interest rate of the country increases the currency rate strengthens. But if the opposite happens they have to be ready for the losses.
A stronger currency provides high returns. Therefore, traders should check the financial and economical conditions of the currency, the country it belongs to. It will support them in making good profits over time.
When trading in the forex market, traders have to check the stability of the country issuing the currency. It will make their trade much stronger and help them earn from the market.
Country if selected is in a bad economic condition will impact the trade and currency price. Thus, traders will have loss and have to face the country’s risk. In this, traders can check with the central banks of the country, their value of currency, reports of the country’s position in the market.
Checking all these aspects is highly important for a profitable trader and to avoid the country’s risk.
Counterparty risk is the financial transaction risk. In this the company provides the asset with the investor or trader. The risk refers to the default from the dealer’s side or the broker in any particular transaction.
Such risks are mostly in futures or spot trades in the forex market. These are not guaranteed by any exchange. While in currency trades the counterparty risk is from the market maker’s solvency.
In volatile market conditions, the party may refuse to perform the contract. Such situations traders have to be aware of and know how they can manage the situation with their strong contracts.
The five common risks involved in forex trading are highly significant for profitable trading. If a trader is well aware of the risks they can manage their trades well. They can take all the required precautions to avoid market risks and ensure their security of profits.
Trading in the forex market is profitable if the trader has good knowledge. So understand the five forex risks clearly and make excellent currency trades.