5 Forex risks traders should consider

The forex or foreign exchange, buying and selling of currencies all around the world. Same as on the stock market the end goal of forex trading is to profit by buying and selling. Forex traders can specialize in a couple of currency pairs against the stock traders who must check hundreds or even thousands of companies in different sectors. Every day on the forex market happens more than $5 trillion in total transactions. Forex trading has a high trading volume so this financial product is classified as a highly liquid financial product.

The first one is Country Risk and Liquidity Risk

The liquidity in forex is much higher than the exchange currency futures, especially when the US and EU trading hours are open. When you invest in currencies, one of the ”must” you need to check the structure and stability of their issuing country. In many countries, exchange rates are fixed to the leader of the world as the US dollar. The central banks need to sustain adequate reserves to maintain the fixed exchange rate. Any currency crisis can occur to a frequent balance of payment deficits and results in the devaluation of the currency. Sure this has an effect on forex trading and prices. If the trader/investor predicts that currency will decrease in volume, they may start to withdraw their assets. We can remember the year 2019 the Argentine Crisis when their currency ultimately collapsed. 

The second one is Counterparty Risk

Trading credit or the company that provides an asset to the investor. This risk falls into the more complex category, limited by regulations that every country has in the G7. Every trader needs a bank or a broker who carry out trades. If the institution does in bankruptcy, you can guess what will happen to the investor’s money? First, check if the broker is regulated in case of bankruptcy. There you need to find the documents step by step how to get money recovery if the broker bankruptcy. The second very important thing is to make sure that the broker has segregated accounts, this means that the broker doesn’t use investor’s funds to run the broker. 

The third one is Transaction Risks

The transaction or exchange rate risk refers to changes value of currencies daily. The risk here is that your open positions change every second. On trading forex platforms like MT4 this risk name is SPREAD, and is the difference between the bid price and ask price. This means when you open a trade on MT4 or any other forex trading software you will always start with minus pips. 

The fourth one is Interest Rate Risks

Interest rate risk can potentially increase the spread on the forex market, to protect from this you should use a broker with fixing spreads. Floating spreads are changing every second and can very increase your trading risks. Central banks rate decisions are every month, to avoid that risk, don’t open trades during Interest rates economic events and also use a broker with the fixed spread. 

The fifth is Leverage Risks

The ”Mr. Leverage”, the part where traders their account risk without realizing it. Please note: higher leverage is not bad if you exactly know how to manage the risk and how to use it. Forex trading is very popular as you can trade big positions size with a small initial investment. During volatile market conditions like last week with GBP pairs, aggressive use of the leverage will result in losses in excess of the initial deposit. Investors should be very careful using leverage. 

We have a long list of risks, so the losses may be bigger than expected at the start. As this is leveraged financial asset 95% of forex traders lose their capital and stop trading in less than 2 years. The fact, if you want to become a constantly profitable forex trader you need to stick to the trading plan and also to the risk management plan.