Getting Along with Forex Risks

Is Forex Trading Risky?

There is no way you can trade on Forex without losses. You can’t avoid the risks. However, you can learn to control them. To do this, you need to know what the risks are and what management methods are suitable for them.

We will look at 5 common risk groups and learn how to work with them:

1. Trading
2. Systemic
3. Technical
4. Force Majeure
5. Criminal

Trading Risks

This includes any events on the foreign exchange market itself:

• High volatility
• Low liquidity
• Margin trading
• Gaps, etc.

Strict adherence to a well-thought-out risk management system will help you. There are thousands of articles on this topic on the Internet. I will list a few main points here so that you understand what this is about:

• Use Stop Loss for every trade. Don’t forget about Take Profit if you can’t frequently monitor your charts.
• Set the maximum risk at 2% of the total capital for each position.
• Don’t enter a trade if the risk-to-reward ratio exceeds the established minimum of 1:3 or at least 1:2.
• Each trading signal must match the list of your requirements by 100%. If even one point is missing, wait for the next trading opportunity.

Your trading risks can also be mitigated by diversifying your investments.

It's worth considering the most common forex trading risks more detailed.

• Leverage Risks in Trading. In the foreign exchange markets, investment of a small amount of money gains you access to substantial trades in foreign currencies. Leverage can be as high as 100:1. However, small currency price changes can result in considerable profits or losses when dealing with a huge amount of money. So, leverage risk is the risk of losses that overextend an initial investment. This risk in forex trading can be manageable if you manage your account properly.
• Interest Rate Risks. Can interest rate changes have a significant impact on the foreign exchange market? Yes, any of the world's most influential central banks can strengthen or weaken its' currency through interest rate changes, causing an influx or withdrawal of investments and affecting exchange rates, and as a result, move the forex market. How can you manage this risk in forex trading? Follow the news, analyze the central banks' announcements, and closely watch their monetary policies to predict and take advantage of surprise rate moves.
• Transaction Risks. Transaction Risks include different risks a trader faces when there is a time delay between transaction and settlement. The exchange rate change can impact the expected return from a deal or transaction due to the time differences between the contract's start and when it settles. The longer a deal takes to finalize, the more the transaction is vulnerable to risks. You can mitigate risk of forex trading using derivatives, like options and forwards.
• Counterparty risk. Who is the counterparty? Every deal or transaction requires a buyer and a seller. They are counterparties to each other. Counterparty risk is the probability that one party may be unable to fulfill its part of the deal as stated in a contract or refuse to adhere to it during volatile market conditions. This risk of forex trading can result in avoidable losses. Dealing with trustworthy and well-capitalized counterparties is essential to reduce counterparty risk. Diversify the risk by involving more counterparties.
• Country Risk. How can country risk influence Forex trading? Let's see. Investors should assess the structure and stability of the issuing country. If its exchange rates are fixed to one of the world leaders, the central bank of a particular country must sustain adequate reserves to maintain its fixed exchange rate. Balance of payment deficits can cause the devaluation of the currency and, as a result, a currency crisis. And this will have a direct impact on forex trading and prices.

To lower country risk, beginner traders can use a country risk index provided by rating agencies. It helps to navigate international trading opportunities. However, it is a lagging indicator as rating agencies change the rating after some adverse event has already occurred in a particular country. The complexity of сountry risk management is that most aspects of this risk, for example, economic, political, and social, are hard to predict. Moreover, political and economic instability are the main reasons for сountry risk. To manage сountry risk, consider existing domestic economic conditions, monetary policy and sovereign debt, and the political situation.

Systemic Risks

This includes any fundamental events:

1. Important economic news releases.
2. Major political events such as change of power.
3. Significant decisions of large state-owned banks, etc.

You can’t avoid these risks, as you cannot control everything at once. However, you can:

• Start trading with a single trading pair and gradually increase your portfolio one instrument at a time.
• Avoid trading during major news releases. If you want to trade the news, tighten your Stop Loss.
• Stay up to date with the latest events in the countries whose currencies you trade.

Technical Risks

Since trading takes place online, you can lose money due to technical failure or loss of signal. You can reduce the risk of such events as follows:

1. Choose a trusted broker with minimal technical failures.
2. Provide yourself with a reliable internet connection, or better with two, just in case.
3. An alternative power source can save you in case of a blackout.
4. Take advantage of a reliable VPN server.

Force Majeure

This includes any contingency such as natural disasters. Nobody can predict those. However, if you use Stop Loss for each of your transactions, then your positions will be closed with minimal losses. When the situation is back to normal, you can return to trading. Until then, it is best to avoid certain instruments because the market situation will be unpredictable.

Criminal Risks

Where there is money, there are scammers. Make sure your trading account and Trader’s Cabinet are protected by a strong password. Don't share your data with strangers and make sure they don't have access to your computer or phone.

Be extremely careful. Many scammers pose as brokerage employees and fraudulently deceive money. Before transferring funds, make sure to communicate with an official representative of the company. It is best to do all transfers from your Trader’s Account in order to avoid fraud.

Yes, as in any profitable business, there are many risks in Forex. However, with the right approach, you can deal with them. Losses are inevitable, but you can minimize losses and cover them with higher profits. Don’t risk in vain! Good luck.