Chapter 1 Forex Risks
Forex risk management is one of the most debated topics in trading. On one hand, traders want to reduce the size of their potential losses, but on the other hand, traders also want to benefit by getting the most potential profit out of each trade. And there's a common belief that in order to gain the highest returns, you need to take greater risks.
However, what on earth the forex risk is? Here is the answer.
Forex trading risk is simply the potential risk of loss that may occur when trading. These risks might include:
Market risk
This is the risk of the financial market performing differently to how you expect, and is the most common risk in Forex trading. If you believe the US dollar will increase against the Euro and you buy the EUR/USD currency pair only for it to fall, you will lose money.
Leverage Risk
Because most Forex traders use leverage to open trades that are much larger than the size of their deposit, in some cases it's even possible to lose more money than you initially deposited.
Interest Rate Risk
An economy's interest rate can have an impact on the value of that economy's currency, which means traders can be at risk of unexpected interest rate changes.
Liquidity Risk
Some currencies are more liquid than others. This means there's more supply and demand for them, and trades can be executed very quickly. For currencies where there is less demand, there might be a delay between your opening or closing a trade in your trading platform, and that trade being executed. This might mean that the trade isn't executed at the expected price, and you make a smaller profit (or even lose money) as a result.
These risks above happen from time to time. If you look forward to lowering your trading risks and increasing your return, you should set up a better risk management. They will be demonstrated below.
Solution for Market Risks
Don't overtrade or risk being on a margin call. It's best that your trades are sized sensibly and made with your funds in mind, which should be sufficient to cover possible losses.
You can also minimize your losses through stop-loss orders. This way, your trade will close at the best price available.
Solutions for Leverage Risks
Always remember that you put yourself at a high level of risk if you use leverage aggressively. You don't always need to use the risky leverage that your broker offers.
Solution for Liquidity Risks
Because trading hours in Forex span 24 hours and often include the weekend, gap risk is reduced. This allows you to hold positions over the weekend. You just need to be cautious, especially when increasing the size of the spreads.
You should also be on the lookout for instances of higher volatility, which creates trading opportunities with a potential for a higher profit.
Solution for Interest Rate Risk
Keep up with the changes in interest rates, so you can trade based on differentials.
