Risks Every Forex Trader Should Prepare For

　　

Any Forex trader will tell you that this industry isn’t for the faint of heart. Apart from not having a centralized market to guide you in trading, the Forex market can also become volatile and uncertain at any given moment. If you’re not well-informed or alert, you can lose more than your investments.
The first step to any successful Forex trading career aside from avoiding trading mistakes is to learn all about these common risks and how to mitigate them:

Country risk

There are two types of country risk. First, if a country experiences instability, its currency can plunge when investors pull out in fear of losses. Second, a country can intentionally devalue its currency to help with an ailing economy or to stay competitive in the trading market. Also called “devaluation” risk, this can greatly affect the value of a trade. 

Mitigation: To better manage these country risks, it’s important to diversify your portfolio by investing in different currencies.

Leverage risk

When you start trading Forex, chances are, you will not have a huge enough capital to turn a significant profit. Hence, you’ll be required to put some money into a margin account that will give you leverage to trade foreign currencies. If prices fluctuate, some platforms will require you to put more money as an additional margin. The risk increases as you keep using leverage, as leverage trading magnifies winnings but also amplifies losses.

Mitigation: Consider putting a limit on your leverage or simply trade with a lower ratio to be safe. Trading with a high leverage ratio can pose risks, especially for new traders.

Exchange rate risk

This risk is explained by the International Trade Administration (ITA): “The relative values of two currencies could change between the time the deal is concluded and the time payment is received. If you are not properly protected, a devaluation or depreciation of the foreign currency could cause you to lose money.” 

Exchange rate risk can be quite unpredictable, and it’s usually related to a country’s interest rate. When interest rates increase, a country can expect to receive huge amounts of investments. On the other hand, any decrease in interest rates can lead to disinvestments.

Mitigation: Stay alert to announcements on rate adjustments by central banks.

Counterparty risk

A counterparty is a company that provides the asset to an investor during a financial transaction. This means that any counterparty risk involves the risk of default from the broker or dealer while a transaction is ongoing.

While most companies today provide spot and forward contracts to give traders more confidence, they don’t guarantee protection since they don’t have any clearinghouse or exchange. Counterparty risks are also abundant during volatile market conditions when the counterparty may not be capable of adhering to their contracts.

Mitigation: Reduce counterparty risks by trading high-quality counterparties with peak-level credit ratings only. 

The bottomline

Forex trading can be lucrative, but it requires research, practice, and focus. Stay on top of industry news and updates and mitigate your risks to increase your chances of success.

Make informed decisions with the most up-to-date and reliable financial data, exclusively provided by vtmarkets.com.