Thursday 11 May 2017

Is Forex Trading Risky?

Forex is considered the biggest fiscal market in the world currently due to the large sum of money managed online on different forex trading platforms, which makes it one of the best financial investments to venture in. Ideally, like any other financial market, there are some risks involved and can be incurred by a forex trader anytime when trading in forex, which may include leverage risks, price risks, transaction risks, and interest rate risks among others. However, there are a number of effective forex trading strategies that can help minimize losses and maximize profits.

Risks Involved Trading in Forex and How to Overcome Them
1) Leverage Risk
Leverage risk is the mechanism by which a forex trader can control a large financial market with a small amount of initial capital. To overcome leverage risks, it is advisable that you don't risk more that 2 to 3 % of your account's value in one trade. This is important since when a small percentage is traded at a single trade and prices fluctuate, a trader will lose not a lot of money than what they can afford.
2) Interest rate risks
Interest rate risk has a huge influence on currency value; a country with high-interest rate will normally have a stronger currency since investors will be attracted to shift their assets to that country: On the other hand, when a country's interest rates fall, investors will pull out their resources and focus on countries with higher interest rates. As such, if the interest rate differential of one currency versus another rises or falls, the exchange rates and forex prices will also change significantly. Therefore, a forex trader can avoid interest rate risks by closely studying the economy of a country and the strength of its currency, so that they can foresee interest rates changes earlier before they occur and make necessary forex trading adjustments.
3) Price Risks
Just like any other trade out there, forex prices are driven by short-term or long-term supply and demand of a given currency, and as a result, may cause prices to move up or down drastically. Traders who employ some risk management techniques may have an easy time in controlling risks associated with prices. On the other hand, a trader may foresee price changes if they have in place a strategic plan to help study supply and demand of different currencies so that they are not caught unaware and incur losses due to changes in prices.
4) Transaction Risks
Transaction risk is also one of the most common risks a trader can come across when trading in forex: Since forex trading occurs on a 24-hour basis, exchange rates tend to change frequently at different times of the day or night, which leads to currencies being traded at different prices at different times of the day: This changes in exchange rates may occur before a given trade settles and cause big losses; consequently, a forex trader need to know the best time difference between the time they enter a trade and the time they exit the trade. The time differential should be as minimum as possible since the greater the time difference between entering and settling a given trade, the higher the transaction risk is involved.