The foreign exchange markets are world renowned for their ability to drive vast sums in profit growth, and traders who can achieve this can become very wealthy indeed. However, it would be wrong to suggest that foreign exchange is a zero sum game, and in fact there are extensive risks present in every position you come to trade. Whether it’s a short position over the long-term, or a long position on a day trading or scalping basis, the risks of forex remain an ever-present threat to your longevity as a trader, and to your ability to keep trading going forward. But what do these risks look like, and how do they present themselves during the course of your trading?
Understanding the risks involved in foreign exchange is the first step to being able to trade currency comfortably for a profit. But what are the risks, and how can they be controlled as you go about your forex trading business?
Foreign Exchange Market Risk
Forex markets are consistently awash with risk, and it is the job of the individual trader to find his or her own ways to combat these effects. Market risk is arguably the most pronounced of all these risks, and is characterised as the threat that comes from simply being exposed to a market. During the life cycle of any trade, it is natural that the markets will move up and down. The market risk is the risk that the market collapses or exploded in the reverse direction to your trade during the lifetime of your exposure to it, thus rendering you with a substantial loss to foot. Market risk is unavoidable in essence, but it is possible to choose positions that have a lower default risk profile, simply by being more thoroughly researched in the markets you intend to trade. The less time you are exposed to a trade, the less significant your market risk will feel.
Foreign Exchange And The Risks With Leverage
Leverage is a strange beast for most traders to become comfortable with. On the one hand, it has the single-handed capacity to generate vast profits from simple positions, with the ability to yield much more significant profits than in dollar for dollar trades. However, by the same token it can be incredibly risky, and traders who end up using leverage extensively often find this a difficult balance to strike. The more leverage you take on, the more volatile your account will behave when you trade. In this respect, profits will be felt more acutely, while losses will resonate much more strongly on the downside. As such, traders need to be careful when using leverage – no one wants to lose all their capital, after all!
Foreign Exchange Economic Risk
There is always a degree of risk that the underlying economy to which a currency relates will behave in an unexpected way, or that its value will decline in a way that makes it problematic for traders to capitalise. This is known as the economic risk of forex, and is ever present. However, with good research and a solid grasp of the fundamentals, it should be possible to turn a profit in the face of these threats.