Forex trading seems to be getting increasingly popular as of late. However, unsurprisingly, most new traders who seem to be getting into the forex game with the goal of making a quick buck end up getting their fingers burned.
The reason we mention its unsurprising is because most don’t bother learning and education themselves about the risks involved in forex trading. This is the primary reason many of them even end up losing more than their initial capital.
If you’re someone sitting on the fence and considering an entry into forex trading, you might first want to take a look at these top risks involved in the forex game.
Leverage is basically something that allows you to make substantial trades even if you have invested a small amount of money. For example, some well known forex brokers such as CMC Markets may offer a very high leverage, usually around 50:1 for even small traders, meaning that you can make trades worth 50 times more than your deposit.
While this may sound exciting to many new traders, it’s actually a double-edged sword. After all, a higher leverage also means that all it would take is a few points fall in the currency’s price you have bought to wipe out your entire capital.
What more, if you don’t manage to square off the position in time, the losses may extend to much higher than even your initial capital, triggering a margin call and making you pay an amount which may be higher than your initial deposit.
More often than not, the forex market turns out to be too volatile to new traders’ liking. When the prices are fluctuating very quickly, new traders may end up confused about whether to go long or short, or square off their existing positions or stay put.
Furthermore, such a high level of volatility may even trigger small stop losses in a matter of a few minutes or sometimes even just seconds. However, as most small traders can’t afford losing more than a small amount, they may always end up on the losing side during a volatile market.
Interest rate risks
Currency prices are very sensitive to interest rate changes. When a country’s interest rate changes, the price of that particular country’s currency tend to fall or rise drastically, depending on whether the interest rate has been decreased or increased.
Unless the new traders are aware of such things, they may not understand what to make of an interest rate change announcement and end up making a trade which may go terribly wrong.
Other type of risks
There are also many other type of risks involved such as the transaction risks, counterparty risk, country risk, and more. Most new traders are usually unaware of this long list of risks, and hence are in no position to take steps to safeguard themselves from such risks.
That being said, forex trading is not something you would get into in a hurry. You must be aware of the risks and analyze them by relating with your current financial position in order to find out whether you would still like to give it a shot.