Risks of Trading Forex Currency Markets
The forex an acronym for “Foreign Exchange” is the world largest financial market, trading nearly $2 trillion of world currencies daily. Currencies are traded by individual retail investors, financial institutions, and corporations doing business. Retail investors and banks trade to make profits and corporations often trade in the normal course of conducting business in different World markets.
How Is Currency Trading Done?
Brokers and market makers do retail currency trading. Traders place trades through brokers who, in turn, place corresponding trades on the interbank market.
Why Do Currency Values Change?
A Currency values can change for many reasons. Sometimes they react to external political and economic news. At other times, value changes are driven by trading in the market itself. Often, both external and internal the events drive currency value changes on the Forex.
For example, the U.S. Dollar is strong; companies in the United States may increase their purchases of the European products, which have become correspondingly less expensive. To pay for products, they exchange US Dollars for Euros. When large numbers of dollars are exchanged for Euros over a short period, demand for the Euros increases.
Consequently, the value of Euro increases and the value of the US Dollar decreases.
Currency trading is highly leveraged. Moreover, the Forex is lightly regulated. Spot trades are not regulated at all. Both factors increase the risk of Forex trading. The real key to success with the currency trading is to trade conservatively while employing some risk management.
Almost all the novice traders should begin trading on a practice trading platform that allows them to make hypothetical trades without risking the investment capital. When and if they see a positive results, they can begin trading on the Forex itself.
Who Trades Currencies?
Currencies are traded by individual financial institutions, retail investors and corporations doing business. Retail investors and banks are trading to make profits and corporation’s trade in the normal course of the international business process.
How Do Successful Traders Trade in Forex?
Traders who make only a few concentrated large trades are more apt to lose money. On another hand, traders who distribute the trading funds over many different trades diversify their risk and have the better chance of the trading profitably. Similarly, traders who leverage their trades aggressively are more likely to have large losses than those who don’t.
Making money trading on the Forex isn’t impossible, but it’s difficult. Advisable practices include:
- Begin trading with a practice account.
- Diversifying risk by making several small trades in different markets rather than a single trade.
- Using stop loss orders to limit the potential losses.
- Avoid using the available leverage, which can exceed 50 to 1. At 50 to 1 even a two percent difference going against the trade results in a total loss of all invested funds.