Even though the forex market lets you enjoy several great advantages, it also whips out various risks that you as a forex trader must dodge or avoid in order to make a great trading career. It is important that you know this risks from the get-go if you’re serious about making serious money off of the forex market.
In this article, we list down the primary risks all forex traders must mitigate in order to survive the foreign exchange market with profits.
Lack of Transparency
Because of the deregulated nature of the forex market, which is dominated by brokers, you are actually trading against pros. Being broker-driven means that this market at times may not be fully transparent. A trader may not have full control on how his trade orders get filled. He or she may also not get the best price out there. He or she may also not get a good view of trading quotes as provided by his or her selected broker.
A quick and easy solution for this downside is to deal only with regulated brokers that fall within purview of broker regulators. The market may not be under the control of the regulators, but remember that the activities of the brokers are still regulated.
Complex Price Determination
Forex rates are affected by various factors, mainly global politics or economics that can be difficult to analyze information and draw reliable conclusions to trade on. Most forex trading happens on technical indicators, which is the main reason for high volatility in forex markets. Getting the technicals wrong will usually lead to a big loss.
High Risk comes with High Leverage
Forex trading is available on high leverage, which means that you can get a profit-loss exposure multiple times bigger than the trading capital. Forex market allows leverage of 50:1, so one needs to have only $1 to take a forex position worth $50.
The trader can indeed benefit from the leverage, but one must keep in mind that the chances of huge loss are also magnified. Forex trading can easily turn into a very bad career unless one has good knowledge of leverage, an efficient capital allocation scheme, and strong control over emotions.
In the stock market, a trader can seek professional assistance from portfolio managers, trading advisors and relationship managers. Forex traders are wholly on their own with little to no assistance. Disciplined and continuous self-directed learning is a must throughout the trading career. Most beginners quit during the initial stages, mainly because of losses suffered because of limited forex trading knowledge and improper trading.
With no control over macro-economic and geopolitical developments, once can easily suffer big losses in the highly volatile forex market. If things go wrong with a specific stock, shareholders can put pressure on management to initiate required changes, and they can alternatively approach regulators.
Forex traders have nowhere to go. The 24/7 markets make it difficult to regularly monitor prices and volatility. The best approach is to keep strict stop losses for all forex trades and trade systematically through a well-planned approach.