Understanding the risks of the forex market and how to avoid them

With over $5 trillion daily trade, forex, also known as the foreign exchange market of fx for some, is the world’s most massive financial market. While it gives essential functions to many people and businesses, it also poses a lot of risks. After all, easy money will always be too good to be true. Forex traders may experience some troubles along the way, such as price fluctuations, leverage, regulations, external market forces, and the like.

The most common risk is the fluctuation of currency values.

Let us talk about the most common risk a trader may encounter in the forex market — fluctuating currency values. And when we say fluctuating of currency values, we refer to the up and down movements. There are somehow two main reasons why this may happen, which are external and internal events.

An external event may be about an event or news concerning the politics or the economy that affects the forex market. On the other hand, an internal event refers to occurrences in the market itself that impact currency values. Yes, these are risks, but there are ways to evade these. A trader must be alert to news events, determined to learn more about the ins and outs of the forex market, and learn how to choose and execute chosen trading strategies well.

A trader can take advantage of these price fluctuations by making accurate forecasts and speculations, for example, assuming that the UK Pounds is currently a more robust currency than Euros. An investor may buy or invest in goods coming from Europe because it is now cheaper. Before purchasing these goods, the investor exchanges UK Pounds to Euros. The investor uses these exchanged Euros to buy European goods. In this scenario, we can say that all currencies are dependent on each other. When there is a massive demand for one currency quickly, say in this case, the Euro, increases in value while the UK Pounds decreases since the Euro is becoming stronger.

Other risks that forex traders should take note

There are few reasons why people would want to trade currencies. Retail investors and financial institutions like the bank trade because of the apparent reason: to make profits. Businesses and corporations trade currencies when they buy and sell products and offer services internationally. However, some people are skeptical about this type of trading because they think it is not regulated enough or not regulated at all. Let us add the fact that forex trading is highly leveraged to the list of risks. And when we say highly leverages, we mean a high amount of debts.

How can a trader avoid risks?

The facts stated above are some of the reasons that make some traders avoid forex trading. However, any trading involves risks, so does the forex market. A trader can avoid or even evade these risks by proper risk management.

New traders can use a practice trading platform to make hypothetical trades without using their investment capital. When they feel confident enough, they can trade in the live forex market.

Another risk management is using a stop-loss order. It refers to minimal trades in different markets instead of one full-blow trade.

Deno Max
the authorDeno Max