One of the main reasons for the sudden surge of people who want to start forex trading is the low capital required to create an account and start trading. All you basically need is a computer or a mobile phone with a good internet connection and a small capital. Some brokers even offer as low as $10 as a requirement. However, traders should remember that it comes with risks. It is important to know the four types of risks that can occur in a trader’s career.
Volatility
The forex market is the most liquid financial market which means the volatility is also high. Volatility is a double-edged sword, traders make a profit because of the changes in currency prices. However, as with any financial market, the market can go against your position in the trade. Without setting certain parameters like stop loss, a trader might end up losing a lot of money or even draining his entire account.
Understanding Market Risks That Are Uncontrollable
The risk that affects a particular market, geographical region, and asset is called unsystematic risk while the risk that forex traders experience in the market is called market or systematic risk. Through diversification, unsystematic risks can be reduced.
Some of the risks that affect the prices of the forex market are:
- Political events
- Changes in legislation and tax policies
- Natural disasters
- Inflation
There is also a useful risk which a trader wants to encounter. This is how forex trading works. The fluctuation in the market price is how traders generate profit. Paired with a good strategy, and not letting emotion take over your decisions, the end result will be in your favor.
Counterparty Risk
Having a truster broker is very important to avoid counterparty risks. This risk usually happens when the broker doesn’t want to pay because of regulatory concerns or worst, they go bankrupt. Do the research and check reviews of top brokers. Most platforms offer demo accounts too. This is a good way to try out the interface and the overall feel of the platform without risking any of your hard-earned cash.
Leverage Risk
One of the most enticing features of forex trading is its leverage. It allows investors to enter a large trade with just a fraction of the total amount. Basically, the broker gives you access to their funds and the trader just has to deposit a small amount as a margin. However, it comes with disadvantages too. This might tempt traders to keep entering a trade without thinking about the consequences. Also, if you don’t set a stop loss or take profit, you might lose money and your position if you can’t deposit more.