Have you ever wondered why Forex trading is one of the most popular online businesses nowadays? It’s clear that traders can earn huge profits if they’re persistent enough with their trading strategies and know the Forex market well.
The market is known as the most liquid financial market on the planet, and it facilitates purchasing and selling of currencies worldwide. It’s similar to stocks. Traders are up to yield a net profit of buying low and selling high.
When it comes to trading volume, forex assets are known to be classified as highly liquid assets. Forex usually consists of currency swaps, exchange swaps and options. Nevertheless, there are plenty of risks that are in association with leveraged products and forex traders. They can lead to sustained losses.
People like to risk while investing and trading because they know the universal truth that there are no big profits without certain risks. That’s why we’ve prepared the top three risks you should be aware of while trading Forex.
#1 Leverage risks
The first thing you must know about it is that leverage requires margin, which is a small initial investment. It’s mandatory to gain access to actual trades in foreign currencies. Some small and unimportant price fluctuations can lead to margin calls when an investor has to pay an additional margin.
Aggressive leverage use during volatile market conditions can lead to substantial losses in the vitality of initial investments.
#2 Transaction risks
Exchange rate risks are transaction risks. They are associated with time differences between the start of the contract and when it settles. The exchange rates can change even before the trades drop because Forex trading happens 24 hours a day.
It means that some currencies can be traded at different times and prices during the Forex trading hours. The more significant the time difference between the commencement of the contract and his settlement, you’d need to be aware that an agreement will increase the transactional risk.
Keep in mind that any time difference can allow exchange risks to fluctuate; corporations and individuals to deal in currencies face increased and transaction costs.
#3 Interest rate risks
In all the introductory macroeconomic courses, you can learn that interest rates are affecting the exchange rates of many countries. In case one country’s interest rates have risen, you’d know that its currency will also strengthen. It happens due to an influx of investments in the assets of that country. Remember, the stronger currency is the one that will provide the higher return.
On the other hand, if the interest rate falls, you can expect its currency to weaken as investors start to withdraw all the investments they’ve previously made. The differential between currency values can cause all Forex prices to change dramatically. It happens due to the nature and indirect effect of the interest rate on exchange rates.
Taking risks while trading Forex is an inevitable part of it. That’s why every trader needs to develop its strategy and stick to it no matter what. Being aware of these top three risks might help you oversee potential problems in future trading and make you avoid them on time.