Foreign Exchange Risk

Chapter 10

Forex trading is nothing without its risk.  And it involves a lot of risk. If it didn’t, everyone would be millionaires. A lot of beginners would jump right into trading and ignore all the risk, resulting to rock bottom and huge financial losses. As a beginner, such as you, it’s time to learn about the risks in forex.

We’ve made it to the last chapter. And it all comes down to this. After getting through the basics all the way to choosing a broker, it’s time to conclude this forex trading guide with risks.

Why is it so risky?

Every market is risky, and there’s no exception in the forex market. Before entering, ensure that you really made up your mind carefully. Learn every trick and strategies as you can that would help you make decisions wisely before putting your money on the line.

With the question why is it so risky? Here are the following facts:

Fact 1

It’s unpredictable. Movements are like huge waves. Sometimes they’re huge, other times they’re small. If you can’t ride them, you’re dead.

Fact 2

It’s decentralized. You can lose money in the forex market before you could even ask any questions. You take it as you see it.

Fact 3

Since the market is colossal, it’s impossible for you to know all there is to know about forex trading.

Consider these basic facts and you can go a long way in the forex market.

Types of Risks in the Forex Market

What risks you should look out for? Let’s discuss about them and why you should consider them.

Leverage Risk

By now, we all know what leverage does. Sure, it could lead to higher profits. But what if your trades went against you? It’ll result to huge losses.

To avoid this risk, there is what we call a margin call (chapter 2).

Transaction Risk

This risk is about the exchange rate risk that may occur as a result of time difference between the beginning and the end of the trade.

Interest Rate Risk

As what we learned from chapter 3 about currency pairs, interest rates affect exchange rates. If the interest rate of a country is high, the currency strengthens. If the interest rate is low, the currency weakens.

Country Risk

A currency risk can occur as a result of frequent balance of payment deficits. This typically results to the devaluation of a currency. Before you invest in a country, make sure to assess the structure and stability of that country.

Counterparty Risk

The counterparty is the company that provides the asset to you. This means, this is the risk of default from a dealer or broker in a certain transaction.

Forex Risk Management

Now that you know the type of risk, how can we at least minimize it?

Step 1

Remember, trading is not gambling. If you want consistent profit, don’t think like a gambler, don’t decide blindly, and don’t rely on luck.

The first step to achieve this is to never trade money that you can’t afford to lose.

If you ever do this, your decision making will be compromised and mistakes will occur.

Step 2

Simply start small. Make your trades appropriate for your account balance.

Note that you should trade what you are safely able to trade. Don’t open $100,000 trades with a $1,000 account.

There is really no need to make huge percentages every day. What you should focus on is making consistent percentage instead of large ones.

Step 3

STOP LOSSES.

Remember these?

That’s right, these are total life savers. They serve as your safety net when everything’s going bad.

Take advantage of these and use them!

Bottom line

These steps won’t give you protection from losing money. But these will help you to survive the game.

Many traders would take the aggressive approach. It might be effective for some time, but when it’s over, you’re done. You walk away with empty pockets.

Before we finish this forex trading for beginners, remember to never stop learning. There are more to discover and more strategies to apply. But it’s ok to start small. You’re a beginner and there’s no reason

Why you should start big.

You’ll only find your account slimming rather than getting fat. What matters most is finding ways on how to become successful in forex trading.

We hope this guide helped you. And we hope you’ll make good money in the forex market.

Happy Trading!