Forex Trading Risks – Trading Risks Investors Must Need To Know
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Since the crypto boom in 2018 and profitable returns, every individual is looking for their share of the pie in online earning. Some have started investing in crypto and NFTs, while others have opted for a safer option in the foreign exchange market. Unlike crypto exchanges, forex doesn’t deal with any blockchain currency; it deals with fiats currency pairs used around the world. In simpler terms, the forex market is based on deviation in currency prices; however, ETFs and options trading are added to lure more profitable trades.
Nevertheless, forex markets aren’t any easier than crypto, and there are risks involved. A recent study showed that more than 66% of forex investors end up with lesser capital at the end of the year; abrupt currency changes eat their profits, and their principal amount takes a hit. It also showed 90% of new investor accounts quit their activities within a year, which suggests that new accounts suffer the biggest losses. While the statistics look bleak, we aren’t short of fantastic forex traders who made many fortunes by making the right decisions. Your success in the forex markets comes down to your risk appetite and knowledge.
The foreign currencies market is worth more than 1.93 quadrillions, and its net worth is ten times more than bitcoin. It is an amazing opportunity for traders to change their fate, but it can also have unwanted results. Before you start trading in the forex market, it is essential to acknowledge all the risks involved in trading. In this blog, we are going to take you through the common risks involved in forex trading. We also got a bonus tip for new forex traders aiming to up their forex game.
Table of Contents
Forex Trading Risks: What is Forex Trading
Foreign exchange is a market for currencies, where different currencies can be exchanged based on their demand and supply. Unlike stock markets, the foreign currency market stays live throughout the day for all weekdays. Conventionally, foreign exchange was used to exchange currencies for transactional purposes.
For instance, an importing business in the European Union would require to exchange the EURO for USD to buy goods in the United States. Similarly, a tourist traveling to the European Union from the United States will also need a particular currency for his tourism expenses.
However, the forex exchange has seen rising investments from traders during the past decade, who look to make quick profits by trading the correct currency. As the forex market is open 24 hours a day, it is a viable option for most casual traders. Additionally, the variations and price of currency are often favorable for traders with low capital; hence, they are able to generate quick profit on their trading account without taking the exchange rate risk.
With the rise in interest of investors worldwide, forex markets have also included options and ETFs trading. Options trading refers to a contract that provides the right of purchase at a later date. An option is a derivative asset; thus, it has an underlying value dependent upon the change in the price of currencies.
Foreign exchange trading has gained wide popularity, leading to the development of multiple trading platforms. These platforms allow traders to analyze the market based on market indicators and the latest news. The commodity futures trading commission is the authority that regulates the forex industry around the country, and it involves protecting investors’ rights and ensuring they don’t lose money.
Similarly, the latest developments in trading platforms have also involved future trading authorized by the national futures association. The protections have minimized the risks of forex trading; however, despite all safety, some risks still exist, and we will discuss them later.
Forex Trading Pros and Cons
Pros
- Zero Commission trading
- Highly Liquid assets and easy to sell
- Legal protections make the forex market secure
- Signing up is simple
- Most brokers offer a free demo account to get started.
Cons
- High-risk market: currencies may fall rapidly against each other
- External factors may lead to rapid changes.
- Leverages increase losses in the market.
7 Forex Trading Risks
#1. Exchange Rates
Exchange rates refer to the piece of each currency in comparison to another. Although currency pairs retain their value in the long run, rapid fluctuations can have a massive impact on your portfolio. As exchange rates depend on the country’s customs policies and political events, there is always a risk of a sharp fall in currency pairs if conditions escalate.
A recent example can be the Russian-Ukraine conflict that had its impact on the EUR-USD currency pair. The United States was a forerunner in the wars, and their direct affiliation meant a fall in USD value against the euro.
Although a trading platform may have the technical indicators to portray how the future performance of the currency pair may look, their inference on the external factors is unpredictable.
The exchange rate risk can’t be denied, and if the fall occurs, there is a fair chance that most investors will end up losing money. Hence, it is a risk that you must aim to cater to before entering the market.
#2. Interest Rates
Interest rates are another critical factor that determines the price of a currency pair. Most investors would like to invest in countries with the highest interest rates. So they can enjoy the best returns on their investment. Hence, as soon as the interest rate changes, the hot flow of capital changes its direction towards the country.
The sudden rise in the demand for currency shall lead to a higher price, which would eventually translate into more significant fluctuations. Although interest rates are well announced and are usually predicted and published before being implemented, if traders fail to identify the change, they might end up in an unwanted situation.
In Fx trading, it is essential to keep an eye on interest rates around the globe. International trade administration can be a valuable source to gain insights into the future of a country’s interest rate and demand. They provide adequate data about the trade of currency and can help you make well-informed forex trades.
#3. Losing your Money
If someone tells you of a business that pays you back without risking your money, they are probably joking. Apart from interest rates, no investment offers a fixed rate of return, which means that the rate can be high, low, or negative.
Negative returns are the biggest hindrance to an investor’s confidence, and it is vital to ensure that your investment is protected. Foreign currencies are an atypical commodity to deal with, and there are risks that you may end up losing your money.
Hence, you must seek independent advice before setting upon your forex journey.
#4. Margins and Leverage
Leverage trading appears like a fantastic opportunity for traders to double their profits. It involves receiving the credit from your trading platform that can be used as your principal amount in your trading activity. If a profit is made from the trade, you will be able to magnify it on the excess amount. Unfortunately, the same applies to your losses as well.
Trades on margin carry a higher risk than usual trades, mainly because if a loss occurs, not only will the trader have to bear a loss at his investment, he would also have to compensate for the loss on the margin.
Exchange rate fluctuations aren’t rare for the forex market, and the prediction can often go wrong. Some traders set up collateral that involves 100% of their assets. In that instance, a loss can be extremely expensive.
For novice traders, it is better to start as low as possible. Although the investments will bring lesser returns, it shall provide you with an opportunity to learn how the currency markets work.
#5. Low Liquidity
Although the Forex market is highly liquid compared to stocks and ETFs, some currency swaps aren’t liquid and will possibly result in substantial losses. Currency valuation is an essential aspect of a country’s prosperity; hence, the respective federal reserve bank might set regulations to prevent rapid fluctuations.
The rules may involve daily trading quota/volume or a limitation at overall currency variation, creating liquidity risk for investors.
Although the problem won’t arise for USD and EUR currency pairs, it can often get difficult to sell currencies that aren’t popularly traded. If you have placed a deal to allow trade currency, there is a fair chance that the hope of profit would translate into a substantial loss if the currency isn’t sold at the right time.
#6. Local or Regional Volatility
As you have read here, you will be aware that the exchange rates of any country don’t only depend on its demand and supply, but other external factors play a massive part in its overall performance. Local and regional volatility is existent for less traded currencies; such currencies are often prone to rapid falls if any negative news breaks out.
A recent example can be the fall in the Ukrainian currency after the conflict with Russia. The Ukrainian hryvnia had a rapid fall and dropped to its lowest on 1st march. When a country suggests instability, investors withdraw their currencies from its bank, which increases its supply. Hence, the exchange rate of the currency falls.
Politically unstable regions often operate in volatile market conditions, and it is difficult to predict how the currency would perform in the long run.
#7. Credit Issues
Credit risk refers to the possibility of the counterparty failing to make a payment once it’s due or defaulting on payments purposely. Although the problem isn’t fairly significant for individual traders trading through a platform, banks and corporations may often find themselves under problems when settling in for unregistered exchange transactions.
The commodity exchange act has paid special consideration against firms that aren’t registered as they are suspicious of defaulting payments in cases of losses. The goal is to ensure the investors’ payments are safeguarded and payments are made in due course.
Credit issues can be a worrying situation for any individual trader; hence, it is important to ensure that you are signing up for a trading account authorized by the regional authorities.
Best Forex Trading Course
Investing in the Forex market might seem to be a daunting task especially if you are a beginner, and have just started exploring the Forex market. Although experience is said to be the best teacher when dealing in the Forex market, it is good to learn about the Forex market briefly before making your first investment.
There are several ways in which you can start expanding your knowledge of the stock market. You can either start reading books or ask for tips from your friends or family members who have prior experience of trading on the Forex platform. However, the former is a time-consuming method while the latter is not always a credible learning source.
If you want to learn about investing in the Forex market that would help you gain knowledge, and tell you all you need to know about the market, then you can opt for some professional courses available on the internet. These courses are developed by Forex markets experts who have years of training Forex traders.
Now, there are thousands of courses on the internet that claim to teach you about Forex investment. However, not all of these courses are reliable and give accurate information. So which is the best Forex course for learning the ins and out’s of the Forex market?
Asia forex mentor course by Ezekiel is by far one of the best Forex learning courses on the internet, and they are one of the best learning sources if you want to expand your Forex trading knowledge.
They have been featured on multiple different leading forex platforms and Forex events happening around the world. Ezekiel’s platform is the perfect solution for you to learn because their clients include multiple trainees and bank traders from private trading institutions around the globe.
It is the number one course available on the internet because it also reaches new bank traders and has fun managing if you want to make money from trading forex stocks and other commodities.
You can get a great return on investment by indulging yourself in this systematic course. Even if you are a beginner in the field and do not have enough experience and knowledge about Forex trading, you still join this program with zero knowledge. Everything will be taught to you from scratch, and you can enroll yourself in this program right now to get started.
Check out the testimonials on the website and start your Forex trading journey right away. The good thing about this course is that you will be crystal clear about what you need to do from day one.
They are using a return on investment approach to teaching their students. It is a scientific method of beating the market, and you will not be taught this somewhere else.