Some people do a regular job; these people don’t live a lavish life so that they can save some money for their old. The other take risks and do what they can never afford with a job. Foreign Exchange Market is something that can make you rich within some time if you are too good at it. In Forex (Foreign Exchange Market), the business is to sell and buy the currencies around the world. The ultimate goal of trading here, like a stock market, meant to yield a net profit by buying low and selling high. Forex Markets involve the largest trading volume in the world, and the assets are classified as highly liquid assets. Majority of Forex consist of the spot transaction, forwards, foreign exchange swaps, forwards, currency swaps and options. Being a leveraged product, the risk is involved in it.
If you are a Forex trader, you should consider the following five risks to avoid the losses.
1. Leverage Risks
A small initial investment, commonly known as a margin in Forex trading, is required in the leverage. It helps to gain access to substantial trades in foreign currencies. An investor has to pay an additional margin in case of margin calls because of small price fluctuations. Don’t use leverage aggressively during volatile market conditions, as it will result in substantial losses.
2. Interest Rate Risks
You would already know the basics of macroeconomics. The interest rate has a significant effect on exchange rates either it is low or high. If there is a rise in country’s interest rate, the currency will automatically get strong. The state will witness an influx of investments because of the higher returns on their investment. Likewise, the low interest will stimulate investors to withdraw their investment because the currency gets weaken.
3. Transaction Risks
Your timing needs to be perfect in Forex Trading. The trading continues to be in place round the clock on a 24 hours basis. Transactions risks are an exchange rate associated with the time difference when you begin the contract and the time when you settle it. The greater is the time difference when you enter and settle, the higher the transaction risk. The reason being is: the prices change or fluctuates during trading hours.
4. Counter party Risk
The company which gives the assets to an investor is known as the counter party in the transaction. If the dealer or broker becomes a defaulter, the risk is called counter party risk. An exchange or clearing house does not guarantee spot and forward contracts on currencies in Forex trades. In spot currency trading, the market maker may become insolvent. The counter party may refuse to adhere to commitments during volatile market conditions.
5. Country Risk
Before you invest any currency, you must consider assessing the structure and stability of those countries. Central banks should maintain reserves to main a fixed exchange rate when the US dollar is the only currency of exchange due to superiority in the world order. The frequent balance of payment deficits can bring a currency crisis which will result in devaluation of the currency. Forex trading and prices will be greatly affected by this change.
In case the value of a currency decreases hypothetically. The investors will begin to withdraw their assets, and this will devalue the currency more. The currency crisis would give rise to liquidity dangers, credit risks, and the country’s currency will lose its charm.
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