Risks Trader Be Aware
Risks Trader Be Aware – The foreign exchange market, also known as forex, makes it easy to buy and sell currencies around the world. Like stocks, the ultimate goal of forex is to make a net profit by buying low and selling high. Forex traders have the advantage of choosing currency pairs as opposed to stock traders. Who have to analyze thousands of companies and sectors. In terms of trade volume, foreign exchange markets are the largest in the world. Due to the high trading volume, foreign exchange assets are classified as highly liquid assets. Most FX trades consist of spot trades, forwards, FX swaps and options.
Before starting to play on the stock exchange, a trader should be aware of all the possible risks that he may face. It is unacceptable to conclude transactions without a full understanding of their consequences, but, unfortunately, practice shows that most novice traders prefer to understand the specifics of working on the Forex exchange along the way. And, as a result, they often find themselves in a big minus. Therefore, you need to correlate your financial resources and experience with the goals set and the opportunities available in the market in order to work with profit. This primarily concerns traders who trade in the foreign exchange market.
Top 5 Forex risks
Investopedia highlights the Top 5 Forex risks that traders should definitely consider:
In forex, due to the availability of leverage. It does not require a large initial investment to access significant foreign exchange trades. Small price fluctuations can lead to negative margins when the investor needs to spend some of the money in the account. During volatile market conditions, aggressive leveraging results in significant losses in excess of the initial investment.
Interest rate risks
We know from the basic macroeconomic rates that interest rates affect the exchange rates of currencies of different countries. If interest rates in a country rise, its currency is strengthened by the inflow of investments in the assets of that country, because a stronger currency provides a higher return. Conversely, if interest rates fall, the country’s currency will weaken as investors begin to withdraw their investments. Due to the nature of the interest rate and its effect on exchange rates, the difference between the value of currencies can lead to dramatic changes in forex prices.
Risks per transaction
Transaction risks are foreign exchange risks associated with the time difference between the commencement of the contract and the moment when it is paid. Forex is open 24 hours a day, which can lead to changes in exchange rates at any time. The greater the time difference between the conclusion of the contract and its payment, the higher the risk of the transaction. Any temporary differences allow foreign exchange risk to emerge, and individuals and corporations that trade in currencies face increased, and possibly onerous, transaction costs.
The counterparty in a financial transaction is the company that provides the asset to the investor. Thus, counterparty risk refers to the risk of default with the dealer or broker in a given transaction. In foreign exchange trading, spot and forward contracts for exchange rates are not guaranteed on the stock exchange or intermediaries. In spot currency trading, counterparty risk comes from the solvency of the market maker. During volatile market conditions, the counterparty may be unable to fulfill or refuse to adhere to the contract.
When weighing the possibility of investing in foreign currency. It is necessary to assess the structure and stability of their issuing country. In many developing countries and third world countries. Exchange rates are fixed to a world leader such as the US dollar. In these circumstances, central banks must maintain sufficient reserves to maintain a fixed exchange rate. A currency crisis may occur due to a large deficit in the balance of payments and lead to a devaluation of the national currency. This can have a significant impact on forex and prices.