The forex market is the world’s biggest financial market. However, this magnitude also comes with great risks—plenty of them, in fact. To make money off of the forex market, you have to be wise when it comes to your risk management. Here are what you need to know about the risks in the forex trading market.
Fluctuations in Currencies
The value of currencies can change quickly and sometimes without a warning, and there are many reasons for that. There are times when it’s because of external economic and/or political news, like Great Britain’s Brexit from the European Union. There are times when the market itself fuels the value fluctuations.
Most of the time, both of those reasons cause the value fluctuations on the forex market. In themselves, the fluctuations are not bad. However, it is usually the trader’s inability to accurately anticipate those changes that spur risks.
Here’s an example: when the US dollar is bullish and it strengthens, companies in the US may buy more European goods, which are consequently cheaper due to the stronger dollar. In order to purchase these products, they exchange US dollars for euros.
And when huge quantities of dollars are exchanged for euros, this drives up the demand for the euro. Consequently, the euro’s value increases and the value of the US dollar decreases relative to the euro.
Types of Investors and Risk Levels
Currencies are traded by individual retail traders, financial institutions, and corporations doing business internationally. Retail investors and banks are trading with the view of gaining profits. Corporations participate in the forex market by normally buying and selling goods and services across the globe.
Forex trading is also usually highly leveraged. That means with a small amount of cash investment and a certain amount of margin, investors will be able to control a bigger amount of money. The forex market is also very lightly regulated, with certain types of trades completely unregulated. These factors add to the risks of forex trading.
The answer for a successful currency trading is to trade conservatively as you employ some methods of risk management. Beginner traders should start trading on a demo trading platform, which will enable you to make hypothetical trades without risking their investment capital. After they have seen positive results, they can start doing live trades.
The Habits of Successful Traders
Most of the time, traders who make huge concentrated trades are more prone to lose money. Meanwhile, the traders who distribute their trading funds over many different trades diversify their risk, letting them have a better chance of trading profitably. In a similar manner, traders who leverage their trades aggressively have a higher potential of having larger losses.
According to statistics, nearly 70 percent of forex traders lose money. A separate group of data compiled by the National Futures Association shows that most retail forex traders opt out of the venture after about four months.
When you try to gain money off of the forex market, you have to suffer some risks. However, it’s possible to make money more efficiently if you follow these risk management habits of successful traders:
- Start trading using a demo account
- Diversify to spread the risk in different markets
- Use stop-loss orders to limit potential losses.
- Use leverage sparingly