The foreign exchange market is also known as the forex market and it deals with the buying and selling of currencies throughout the world. Just like stocks, the ultimate goal of the forex market trading is also to make net profit by buying and selling. The forex traders have the freedom of choosing a number of currencies over the stock traders who first have to choose among the different sectors and companies. If you are someone who has been trying to invest in the forex market, you can do so but with the help of a forex broker. Nevertheless, you also need to know the risks that are associated with forex trading so that you can easily steer clear of them. What are they? Check out the list of risks that are usually related to forex trading.
- Risks of leverage: In the forex trading market, leverage needs a very small investment which is known as margin and you need leverage to access to considerable trades in foreign currencies. There are some small price changes which can lead to margin calls where the investor is needed to pay an extra margin. When the market conditions are volatile, aggressive use of leverage can lead to huge losses which can surpass your initial investment.
- Risks of interest rate: When you go through your macroeconomics course, you must have learnt that the interest rates have an impact on the exchange rates of a county. When the interest rates of a country rise, the currency will heighten due to the increase in investments within that nation’s assets as a strong currency will offer higher returns. On the other hand, if there is a fall in interest rates, the currency might also fall as the investors will become reluctant about their investments.
- Risks of transaction: Transaction risk is an exchange rate risk which is related to differences in time between the starting of a contract and the time when it settles down. Forex trading occurs throughout the day and this can result in changing exchange rates before the settlement of the trades. The greater is the time difference between entering of the trade and settling down, there is an increase in the transaction risk. The time differences make fluctuations in forex risks.
- Risk within countries: When you’re weighing the options to invest in different currencies, one needs to keep access to stability of the issuing country. In most of the third-world countries, exchange rates are always fixed to a leading currency which is usually the US dollar. This dependence can have a good impact on the forex prices and trading.
Therefore, if you’re intrigued by reading the article and you have enough guts to invest in the forex market, you might get help from forex broking companies like ETX Capital. You may even get help from the professional forex brokers who can help you make the best forex decisions that will reap profits.