The Forex market presents a great investment opportunity for traders to profit. A $5 trillion daily worth of transactions shows what a profitable venture it is. Understanding the market and having an effective trading plan is essential for success in the market. However, there are risks involved in Forex trading that you should know about.
Liquidity risk is the risk that arises when there is decreased liquidity in the market.
In a liquid market, traders enter and exit the market at the best available price. There is no delay in the execution of trade orders because of the presence of many buyers and sellers. High liquidity occurs during the London and New York trading sessions. Spreads are low during this time.
A low liquidity market is characterised by increased spreads set by Forex brokers. This translates to the increased cost of trading for traders.
This is risk associated with the political environment of a country. Elections in a country bring about change in the government. The new government may come up with new policies and regulations which may impact currency prices.
Political instability in a country may scare off investors. This will weaken the economy which adversely affects the value of the country’s currency. Traders should, therefore, be aware of a country’s political state before investing.
Exchange Rate Risk
Exchange rate risk is brought about by fluctuations in the currency prices.
The currency prices change due to technical and fundamental reasons. This constant increase and decrease in value of currency prices may cause losses for traders, especially when a trade goes against the direction anticipated by a trader. Setting up stop losses can help mitigate this risk.
Retail Forex brokers have increased over the years to provide services to traders. They connect retail traders to the Forex market. However, there are illegitimate Forex brokers who steal from traders. Forex reviews on the internet clearly show complaints from traders who were scammed.
When selecting a Forex broker, a trader should ensure that the broker is regulated by the relevant authorities such as Cyprus Securities and Exchange Commission (CySEC), and other authorities in different countries. Traders should also check on whether they can withdraw their profits without any problem.
Technology risk is associated with the internet trading system where orders are executed. This risk may occur in situations such as; outdated or failed hardware and software, and poor or interrupted internet connection. This risk may occur at a crucial time of trading and may end up costing a trader. This risk can be solved by having updated hardware and software and a strong internet connection.
Risks will always be present in the Forex market. Both novice and experienced traders incur losses at times. The important thing is to identify ways to reduce the loss of capital. Stop loss orders, take profit orders, and managing leverage are some of the few ways to reduce the risk of loss.
We hope you enjoyed reading about the Risks Involved in forex trading. To learn more about trading have a look at our forex education section.