By Liam Thomas
All trading comes with a certain amount of risk. However, they say that one who does not risk does not gain. Trading currency pairs comes with its fair share of risks as well as opportunities. For instance, you are trading with the hope that the market with going your way.
That does not always happen and you could end up with a loss if the trade goes against you. Not so long ago, only banks were involved in forex trading. Individuals are increasingly getting in on the action.
Trading on https://www.equiti.com/accounts/compare-our-accounts/ gives you the assurance you need as a trader. You are on a reliable platform that helps you to discover trading opportunities and manage risks.
Risks in FX Trading
As mentioned above, there are certain risks that trading forex exposes you to. Being aware of these risks is important as it helps you to understand and also learn to manage them. These risks include the following:
- Transactional
- Liquidity and liquidity
- Credit risk
- Exchange Rate
- Risk of ruin
- Leverage Risk
These risks can lead to loss or, at worst, financial ruin. The following is an explanation of the risks in brief.
1. Transactional Risk
Transactional risk includes errors in:
- Handling and confirmation of out trades
- Communication
These could result in losses and the trader may require compensation on the same.
2. Country and Liquidity Risk
Sometimes, some nations go through periods of illiquidity. Also, several countries may impose trading limits on price amounts and volumes. Consequently, price movements and volumes to be traded may vary for some time and these could lead to a loss.
Also, it may not be possible to execute stop-loss and limit orders in extremely illiquid markets. Also, the orders may be filled at ominous price levels. In such instances, very volatile or illiquid markets may hamper the execution of orders.
3. Credit Risk
This happens when an eminent currency position may fail to be paid as per agreement. Credit risks are leading concern for banks and other financial institutions as well as corporations. It is not as high for individual traders.
However, you should carefully examine companies before putting up funds for trading. You can easily check them out online to be sure that you are not risking losing your money.
4. Exchange Rate Risk
Exchange rate risk comes about as a result of changes in currency value. This is possibly due to volatile movements in global supply and demand balance. Exchange rate risk can be monumental. It is based on the direction the markets will move depending on every last factor of what could happen.
These factors affect currencies globally. Off-exchange trading is not regulated. As a result, there are no daily limits placed on futures exchanges. Risk of Ruin
A trader may be unable to handle short-term unrealized losses and end up closing a position at a loss. This may happen even when your view of the market is correct. Traders with enough capital may be able to hold the position and wait for the market to turn around.
However, without adequate capital, you may close at a loss if you are not able to sustain the position.
5. Leverage Risk
What is leverage? It is the ability to trade a large position with small capital. This may sound like very good news to a trader. However, it is worth noting that a large amount of financial leverage increases risk.
If you decide to use leverage aggressively, you risk losses especially when performance is not positive. Moderation may be the best way to go.
Conclusion
Experienced traders will tell you that you must approach trading with caution. While it is possible to make colossal amounts of money, it is also possible to face financial ruin via trading. You should, therefore, do due diligence before you commit your capital.
Research extensively, train and make use of the demo account your trading platform provides. Work with experienced brokers and avoid emotional trading. Consistency and patience will help you stay focused on your investment goals.
