Foreign Exchange (Forex) market represents $5 trillion tradings of world currency, daily. That makes it the world’s biggest financial market. This opens opportunities for world traders to enter the market and make giant profit. Yet, there are also risks of trading in the forex market.
The risks come as the consequence of light regulations, constantly fluctuating currency values, leverage, and other external factors.
Currency value fluctuation
The values of currency change quickly for so many reasons. Those reasons range from political and economic news like Great Britain’s plan to leave the European Union to the market itself driving the changes.
Many traders usually blame the fluctuation for their losses. The truth is their inability to forecast that changes and their risks which direct them to that significant loss.
Types of investors and the risks level
Many people trade currencies, including individual investors, corporations doing business internationally, and financial institutions. Banks and individuals usually trade to make a profit, meanwhile, the corporations trade for buying and selling goods and services around the world.
Moreover, forex is highly leveraged, it allows you to control a huge amount of money with a small amount of cash invested and a certain margin. Besides, since it operates across the world, forex also becomes lightly regulated.
Therefore, there are various risks in the forex market which can result in huge losses. The key to avoiding that risk is by applying some risk management in your conservative trading strategy.
For novice traders, they need to train themselves on a practice trading platform. That platform will give them a chance to make a hypothetical trades without risking their actual capital. Once they get a positive result, then, they can begin a live forex trade.
Ways to become successful traders
Usually, traders who only focus on a few large and concentrated trades have a bigger chance to lose their capital. Contrarily, traders who distribute their funds into various trades and diversify their risks have a better chance to gain profit.
Worst is those who aggressively trade with leverage. These people have the biggest chance to lose among the other type of traders.
Here are the four most advisable risk mitigation process:
- Start trading through a practice account.
- Make several small trades in different markets to diversify your risks.
- Apply stop-loss orders to limit the potential losses.
- Avoid using leverage, until you fully understand how to use it.