Foreign exchange market (Forex) is the biggest challenge a market can offer you. With its average traded value of approximately $383 billion per day, Forex market surpasses by far any other market out there, including the stock market.
There are many opportunities Forex puts at your disposal, but there is also a great deal of responsibility whenever you play this game. Assets are volatile 24 hours a day, so certainty has no place in this world. However, there are seven main currency risks that you can avoid. Let’s see the stages of your Forex activity requires more caution from your side.
1. Interest Rate Risks
Your main focus in dealing with the Forex risks should be the interest rate. The interest rate is influenced by the 8 global central banks, which base their decisions on external economic indicators (The Consumer Price Index, Consumer Spending, Employment Activity, Subprime Market or Real Estate Sales). Follow Economic Calendar.
The higher the interest rate, the higher the profit. However, currency fluctuation has a volatile nature, and this is your risk point. Predictions are not equal to certainties, and your large bet can be lost by dramatically weakened currency.
2. Country Risk
Currency risks depends a lot on the economic phenomena a country goes through. Before investing in your chosen currencies, you should research the level of stability of the country in question. Any feeble rumor which concerns the economic aspect of a country has great power. The investors can withdraw their assets whenever they want from the Forex market under the pressure of even the thought of losing them, triggering a domino effect. More and more investors will consider retreating a safe strategy, hence a rapid decrease in currency value.
3. Transaction Risk
Due to the unpredictable fluctuation of the Forex market, the currency values can experience a sudden change any moment of the day, and it won’t take your contract regulations into account. As long as the exchange market has a capricious nature, you won’t be safe from risks. Individuals and companies must assume the risk of paying substantial transaction costs that are likely to occur between the moment their contract is decided and the moment their contract is activated.
4. The Risk of Ruin
The risk of ruin can become a reality whenever there is risk-reward ratio bigger than 3:1. That is, however, a too limited safety measure, but beyond this ratio you are hunted by great risks. For the binary options it means that if income percent goes lower 50%, you are taking big risks. The risk of ruin intervenes in any emotional activity. Thus, this makes the risk of ruin a reality in the foreign exchange market.
In order to minimize this risk, it is recommended to resort to diversification. Don’t place your assets on a single bet. This strategy allows you to cross some boundaries, but only on educated guesses also.
5. Settlement Risks
As the rules of Forex market depend on the 8 global central banks, the settlement risk plays an important role in your trading activity. The settlement risk is a side effect of the time zones of different continents. During the same trading day, the same currencies can be found at different prices. So, your success does not depend only on choosing a good day for your chosen currencies, but also a specific moment of that day.
6. Dictatorship Risk
This is when a government uses its influence to interfere directly in the Forex marketplace. It’s why it is important to also have a strong cultural knowledge of the world’s history. Even though this risk is the least probable one from this list due to the fact that all major currency markets are located in U.S., you should still pay great attention to worldwide events.
7. Technical risks
Most of the trading platforms nowadays are online to facilitate the access to anyone to the Forex market. However, no matter how many benefits the Internet provides us, we shouldn’t rely 100% on it. A low Internet disconnection or a website maintenance procedure might be the difference between winning and losing your assets.
All in all, these are the seven main risks of trading that you should take into account in your decision-making process. Once you strike a balanced connection between the risks you are facing and the opportunities you can take advantage of, you are ready to start your investment.
Charles Leworthy is a Denver-based financial analyst and contributing editor at ForexBinary101. He is passionate about economics, and after studying the great works of Adam Smith, John Maynard Keynes or Milton Friedman, he decided to pursue a career in the field. He is now focused on the capital market, stocks, bonds, and other types of investments.Start trading now
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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