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Published On: Tue, Jun 20th, 2017

Trading Risk Defined

Before anyone decides to enter the Forex market, it is essential that they understand the risks.  Completely and fully understanding what is at stake is such an important part of becoming a Forex trader.  The most important rule about Forex risk is NEVER risk more than you can afford to lose.  That is a basic rule for everyone trading Forex to follow whether they are trading part time as a hobby or full time, whether they are someone who has extra funds or someone who is hoping trading will put food on the table.

One of the riskiest parts of Forex trading is trading with leverage.   Leveraged trading, is trading with money you do not have.  When only a small percentage of the money used to purchase currency is coming from your margin account, you are risking money that isn’t really yours, although you are completely responsible for it if the trade doesn’t work in your favor.  When trading with leverage, the potential for profit is great but so is the potential for loss.  Multiple positions open all using leverage can add up very quickly and it is very important to be aware of exactly how much is at stake at any given time.  If the entire financial market takes a dip, it can be detrimental if you are holding multiple leveraged positions. Especially when trading with leverage it is essential to have stop losses in place and a risk management plan.

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Forex risk is also connected to interest rates.  When interest rates in a country change, so does the value of their currency.  If you are not aware that a significant interest rate change is on its way, you could be taking significant risks by purchasing that country’s currency.  

When a trader holds positions in many markets at one time, the trader is taking on extra risk.  It’s difficult enough to stick to a strategy and make intelligent and profitable trading decisions in one type of currency or in one market at a time.  When a trader is too ambitious and gets involved in too many markets at the same time, it becomes much more difficult to follow movement in so many different directions from so many different sources.  The risk becomes magnified because it is so much more complicated to be following a trading strategy, and making split second, financially sound decisions with different focuses at the same time.  

Unfortunately, one of the biggest risks associated with Forex trading currently, is your choice of broker.  One of the most effective ways to limit the risk is to choose a reputable broker, who will keep your funds separate from theirs. Choose a firm that has a reputation for returning people’s funds in a timely manner as soon a trader would like to withdraw their own funds.  Check the reviews, the online forums and the local regulations to see which brokers are a safer choice.  

When you are aware of the risks before you enter the Forex market you have a much better chance of mitigating them and protecting your funds.  Making educated decisions is the best way to limit the risks involved in Forex trading.

Author: Nidhi Mahajan

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