It may seem to you Forex trading is easy, but the reality is different. Honestly, to say, there are so many risk factors in Forex trading that must be considered.
Risk of Forex trading
In Forex there is no such thing as risk-free trading, so we are going to discuss with you the significant risk of Forex trading and how to overcome those.
Considering the leverage risks
During trading, leverage needs a little initial investment to gain access to foreign currencies and trades. This initial investment is called the margin. But due to fluctuation, you may fall under margin calls where you may need an extra amount of margin.
This thing happens mostly in a volatile market, and at that time because of the aggressive use of leverage, you may face losses of your initial investment.
Interest rate risk measurement
We cannot exclude the currency risk as it is mostly involved with Forex. Even for a short fluctuation, the market can be volatile. For example, if the UK base rate is 0.5%, on the other hand, Australia has still an excessive rate, then we find the attractions of holding will be yielding.
For this, the interest rate can fall overnight from 4.5% to 2%. This changing of interest rates from country to country’s effect on exchange rates and trading prices can drastically change. To learn more about the interest rate fluctuations, check over here. Explore the overnight carrying cost for different trading instruments and scale your trade accordingly.
Impact of Central Bank’s decisions
It is so important to keep in our mind that the majority of Forex trading and transactions are just operated by banks. No individual has the power to control the market or reduce the fluctuation of the currencies. Banks are using Forex to lower the fluctuation. Central banks like the European Central Bank, People’s Bank of China, or Federal Reserve play a vital role in this case. So, the risk factor in Forex arises when these banks brought any new change in their rules and regulations.
Risk and reward Ratio
Professional traders always are conscious of the risk and reward ratio. Capital and risk of loss management are very crucial. To avoid the possible risk, this ratio system work as a prediction tool for Forex traders. To assess the upcoming risk and the return on a trade, you must do the math early. An ideal risk-reward ratio generally 1:3 but you can still trade the market with a 1:2 risk to reward ratio.
Political event is considered one of the risk factors in Forex trading. Due to political turmoil, the pricing may fall suddenly, which can cause a massive loss of money for the new traders. Research shows that the USA election changes mindset of the investors for an extended period and the market also gets volatile.
Cannot avoid Counterparty risk
In trading, there is an entity called a counterparty or broker. Using them you perhaps you opened your account or closed. Sometimes it happens that this counterparty will not pay you if they become bankrupt or fall victim to law enforcement.
This type of risk is quite problematic to find out at the beginning if you are a beginner Forex trader. So, the best practice for you will be to depend on the regulatory bodies. Try to find a trusted broker who has authentic membership and certification from the regulatory authorities.
Be careful of the spreads
Sometimes brokers increase the number of their spreads if they face low liquidity. Be careful of the commission structures by your broker. Brokers can increase the trading costs only when they are offering fixed spreads or if you are going to operate an aggressive trading method, for instance, scalping.
Hope you will consider those risk factors during Forex trading as a beginner. Besides those risk factors, you focus on all human-made and natural disasters which may seem to you as a risk during trading. There are many advantages of invest in currency trading, let’s see how you can get benefit from Forex trading.
A Note on Virtual Stock Trading
Virtual stock trading is an excellent way to learn the basics of stock market trading. These platforms allow you to try out different investment/trading strategies without putting your own money at risk. It’s typically a good idea to practise virtual stock trading (paper trading) for a few weeks before jumping into the market.