Risks of Forex Trading on the Currency Markets
The foreign exchange is the world largest financial market, trading nearly $2 trillion of the 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 courses of conducting business in different world markets.
How is Currency Trading Done?
Brokers and market makers typically do retail currency trading. Traders place trades through brokers who, in turn, place corresponding trades on the interbank market.
Why Do Currency Values Change?
Currency values can change for various reasons. Sometimes they react to external political and economic news. Other times, value changes are driven by trading in the market. Often, both external and internal events drive currency value changes on Forex.
Example: The U.S dollar is strong companies in the United States increase their purchase of European products, which have become correspondingly less expensive. To pay for these products, they exchange the US Dollars for the Euros. When large amounts of dollars are exchanged for Euros over the short period, the demand for Euros increases.
Consequently, the value of Euro increases and the value of US Dollar decreases.
Is currency trading Risky?
Currency trading is typically highly leveraged. Moreover, the forex is regulated lightly. Spot trades are not regulated at all. Both the factors increase the risk of forex trading. The real key to success with the currency trading is to trade conservatively while employing some means risk management.
Almost all beginner 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 positive results, they can begin trading on the Forex itself.
Who Trades Currencies?
Currencies are traded by individual retail investors, financial institutions, and corporations doing business. Retail investors and banks are trading to make profits and corporations usually trade in the ordinary course of the international business process.
How Do Successful Traders Trade Forex?
Traders who make just a few analyzed large trades are more apt to lose money. On the other side, traders who distribute their trading funds over many various trades diversify their risk and have the better chance of trading profitably. Likewise, traders who leverage their trades aggressively are more likely to have large losses than those who don’t.
Making money is forex is not impossible, but it’s difficult.
Advisable Practices Include:
- Begin trading with a practical account
- Diversifying risk by making some small trades in different markets rather than the single trade.
- Using stop loss orders to limit potential losses
- Avoid using the available leverage, which can exceed 50 to 1. 5. At 50 to 1 even a two percent difference going against trade results in a total loss of all invested funds.