You need to evaluate the risks involved in trading before you put your money down for this kind of business. Forex currency trading is a 24 hour global market that has numerous people trading their currencies daily. This kind of business is not for you if you are not strong hearted or enduring. The goal of trading is to profit by buying the currencies at a low price and selling them at a higher price. You have a good advantage of going with several currencies at one go. Just like any other businesses, there are endless risks when it comes to forex trading.
Here are the top risks you should consider when trading.
The leverage risks
Forex trading has leverage that needs a small initial investment. This type of investment is called the margin which is used to gain access to trades in foreign currencies. Price fluctuation may sometimes lead to margin calls. When this happens, you as the investor will need to pay more margin. When the market conditions are unstable, you will find yourself using excessive leverage and this may lead to huge losses.
The interest rate risks
A change in interest rates will have major effect on a country’s exchange rates. When the interest rates in a country rise, the currency of the country rises. This is due to the influx of investments in their assets. The stronger currency provides some higher returns. The bigger issue develops when the interest rates in that country fall. This will cause the currency to become weak and the foreign investors will take away their investments. These changes in the currency value that are created by the effects of interest rate fluctuation cause a dramatic change in the currency value of forex.
The transaction risks
The transaction risks are involved with exchange rate risks. They are connected to the difference in time between the beginning of your trading contract and when the contract is settled. Forex trading normally takes place in 24 hours, which means the exchange rates can change even before the trades settle. Because of this, people trade currencies at different times during all those hours. The more the time difference available between the trading and settling, the greater the transaction risk.
The counterparty risk
In a financial transaction, counterparty is the main company that will provide the assets to investors. In this case, they provide assets to foreign investors. A counter party risk is the risk of default form the lender or broker of a certain transaction. Forward contracts and spots are not guaranteed during an exchange when you are forex trading. One party in that transaction could end up defaulting, leading to big losses for the trader. You should be aware of counterparty risks and use every time you are making a decision.
The country risk
When you are looking to invest in other currencies, you must consider the ability and structure of the country. Most countries are fixed to a world leading currency such as the dollar. The currency risk is when you invest your trading in a particular country.