Forex Trading Risks - How to Manage Risks. - Eaglesinvestors

Forex trading risks refer to the risk that an investment’s rate may change due to changes in the value of two different currencies. Forex trading risk can also attribute to a chance which a trader faces when he/she need to close out a short or long position in a foreign currency and do so at a loss due to instabilities in exchange rates.

It is also known as exchange rate risk or currency risk. Therefore, fluctuation in the foreign exchange rate between the time traders place a trade and the time traders close it out, will affect the price of the trader’s forex contract and potentially profit and losses relating to it.

Breaking down forex trading risks

Forex Trading RisksForex trading risks mostly affect a business engaged importing and exporting supplies or products. It also relates to business that offers service in individuals and multiple countries who invest globally.
Also, anytime an investor change money into another currency to invest, that trader changes in the currency exchange rate between the currency of their investment and their home currency. Therefore, these changes will have an impact on the investment’s business bottom line or value.

More so, a business exposes itself to forex trading risks by having receivable and payable affected by currency exchange rates. This forex trading risk emerges when a contract between two individuals specifies precise prices for goods and services. Also, if a currency value changes between the delivery date and when the agreement is signed, it may cause a loss for one of the individuals.

The first Risk factor in forex trading is Exchange rate risk

Forex Trading RisksThe exchange rate risk refers to a risk caused by changes in the value of a currency. Its focus is on the effect of continuous and usual shifts in worldwide demand and supply balance.

This implies that, for the period the trader’s position is outstanding, the position is subject to all price changes.

However, the risk focuses on the market’s perception of which way the currencies will move based on all possible factors that happen at any time anywhere internationally.

The second Risk factor in forex trading is Interest Rate Risk

Interest rate risk posits the profit and loss generated by unstable forward spreads along with forwards amount maturity gaps and among transactions in the foreign exchange market. This risk applies to currency future, options, swaps and forward outright. Therefore, to reduce the forex trading risk, one set limits on the total size of mismatches.

A common way is to isolate the mismatches, focusing on their maturity dates, into six months and previous six months. Then enter all the transactions in a computer system to calculate the positions for all the gains, losses and dates of the delivery. Therefore, the continuous analysis of the interest rate is vital to predicting changes that may impact on the outstanding gaps.

The third Risk factor in forex trading is the Credit risk

Credit risk denotes the possibility of an outstanding currency position that is overdue as agreed, due to an involuntary action by a counterpart.  It is something that is vital to banks and cooperations.

Therefore, credit risk is minimal for an individual investor as this also holds for companies regulated and registered by the authorities in G-7 nations.

The forth Risk factor in forex trading is Country and liquidity risk

Forex Trading RisksAlthough the liquidity of forex is higher than that of exchange trailed currency futures, periods of illiquidity nonetheless have been seen, especially outstanding of US and European trading hours.

More so, several countries or groups of nations have in the past enforced trading restrictions or limits or on the amount by which the price of specific forex exchange rates may differ during a given period.

Such limits or restrictions can prevent trades from promptly liquidating unfavorable positions and therefore could account to the trader’s losses.

Moreover, it is also possible for a group or nation to restrict the transfer of currencies across national boundaries.

The groups can restrict or suspend trading of particular currency, issue entirely new currencies to supplement old money. Also, they can order immediate settlement of particular currency or order that trading in a specific currency is transacted by liquidation only.

The fifth Risk factor in forex trading is Leverage Risk

Forex Trading RisksLow margin deposits usually play a vital role in forex exchange. These margin policies allow a high degree of leverage.

Also, a relatively small price movement in a contract can result in immediate loses more than the amount invested.

For instance, if at the time of buying, 20% of the price of a contract was deposited as margin, a 20% decrease in the price of the contract may, if the deal were then closed, result in a total loss of the margin deposit before any deduction for brokerage commission.

In other words, a decrease of more than 20% may cause total damage to the margin deposit. Therefore, investors should be careful when using aggressive leverage as it may increase losses during periods of unfavorable performances.

How to reduce forex trading risks?

Before making a trade, investors should know precisely the amount they are willing to risk. Therefore, understanding risks permit traders to make decisions that will help them develop more profitable trading plans.

Limiting forex trading risk

• Use the right tool – a fast and reliable internet connection, a fast computer, trading platforms and advance analysis.

• Use a protective stop loss. Reduce your loss on every trade is an excellent way to preserve your trading capital. The only technique to figure out an excellent stop level for your trading plan is through optimization and trading.

• Use leverage and margin prudently- investor should consider potential losses instead of focusing on potential gains.

• Use appropriate position sizing- trading in big lots gives investors the opportunity to make more money. However, investors can lose more money that way too. Therefore, if an investor has a new trading plan in the market, monitor it before increasing your position size.

• Treat trading like a business- trading plans need to stipulate how you will and what you will trade. The trading plans require thorough research and evaluation at regular intervals.

Conclusion

To sum up, forex trading is one of the biggest financial markets on earth. Therefore, individuals, banks and business establishments have the potential to make massive profits and losses.

In other words, forex trading risks are the potential loss or gain which occurs as a result of a change in forex exchange rates. Therefore, to reduce the likelihood of financial failure each trader need to have in place some forex risk management strategies.

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