Forex trading is a 24 hour global market. it has uncountable number of people from all over the world trading their currencies daily. The potential for earning a lot of money is huge but so are the risks of loosing so much during trading. Forex trading is an investment strategy that requires patience and skill. The end goal is to make profits by purchasing currencies at lower prices and selling then at higher ones. You can do it with one type of currency or use multiple currencies to maximise the levels of profit. Just like the rewards, the risks in forex trading are major and you could lose all you have within minutes.
Here are some important risks to consider while trading
The leverage risk
Unlike other trading options, forex has leverage which requires you to make small payments for the initial investments. This investment is commonly known as the margin. The margin is used by traders to gain access to trades in other countries. The price fluctuations are responsible for something known as the margin call. During the margin call, investors are required to pay more margins. Unstable market conditions lead to the use of excess leverage and this leads to major losses.
Changes in interest rates have a major effect on the foreign exchange rate of a country. This means that a rise in the interest rates will lead to the rise in the country’s currencies. This may happen dues to the influx of investment in the assets. Strong currencies are known to provide high returns which are great for the country. A big issue will develop when the interest rates begin to fall. This makes the currency of that particular country very weak which leads the investors to take away their investments.
These go hand in hand with the exchange rate risks. Transaction and exchange rate risks are connected to the time difference between the start of your trading contract to the settlement of the contract. Forex trading takes place for a maximum of 34 hours. This means that the exchange rates have the potential to change even before the trades are settled.
A counter party is usually present in most financial transactions. They are the main company that provides assets to the investors. In the case of forex trading, the counter party provides the assets to the foreign investors. The counterpart risk is therefore a risk of default from the broker or lender during the forex transaction. When you are trading, spots and forwards are not guaranteed. One of the people in the exchange could default which can lead to a great loss for the trader.
The Country risk Most people do not consider the structure and ability of a country when investing. This is because almost all countries in forex trading are fixed to a leading currency in the world. When you invest