As with any form of financial investment, there are several risks associated with forex trading as well.
By keeping up with news, developments and major events across the calendar, you can be aware of the changes taking place in the market. If you’re not careful, you may end up with significant losses.
Here are some risks that every forex traders should keep an eye out for:
Exchange Rate Risk for Forex Traders
Stock markets are extremely volatile as supply and demand cause imbalance. It usually leads to changes in currency values, which are accounted as exchange rate risks. Several aspects play a part in this factor, and the risk can be significant in some cases.
Modern methodologies focus on keeping loss at a minimum while going for returns. There’s a limit set, called the position limit, for the most currency a trader can carry at a time. Stop loss levels can be set to prevent larger losses made by traders.
Interest Rate Risk
A country’s exchange rate is affected by the interest rates applied. Increasing interest rates lead towards a rise in the currency value as more people make investment in stronger currency for better yields. On the flip side, forex traders will begin pulling their money out as the value of a currency begins to go down.
Several aspects play a role in the change of interest rate and changing exchange rate, so you’ll have to keep an eye out for recent developments. Forex prices significantly change with respect to these aspects.
Trading on Leverage
Forex brokers allow newer investors to perform trading on leverage, especially when you don’t have enough capital. By depositing a small amount for the trade, going for maximum benefit, and keeping one percent, you can perform good trading on leverage.
People use this method for doubling profits, but it can work against you if the market is not in your favor. The margin involved in leverage is substantial, and the loss can be bigger than any investment you have made earlier on.