Every trader in the FOREX market, trades everyday, with the sole purpose of making a profit. While there are a number of measures one can take to ensure that one’s investments have not gone fully down the drain, it is also important to remember that there are a number of risks which could affect your trading at any time. Some of the risks, which could strike at any point in time are
- Being a victim of a scam or a fraud.
- Unexpected fluctuations or changes in the currency exchange rates.
- Lost payments which may arise when contracts with an unsound party are signed.
- A delay in the confirmation of payments made and receivables received.
- The risk of signing up with an unheard of dealer.
- Since any FOREX dealer would require an initial deposit, a trader gets that much leverage. If the leverage is high, and the market moves in an unpredictable manner, there could be heavy losses made.
- The lack of a central marketplace also at times works against the flexibility of the market.
- In the event of a system failure,, it would mean that traders would not gain access to news and other events at the appropriate time. Also, if its is your system that has crashed, you would be unable to execute new deals, cancel orders etc. This makes the market quite vulnerable in nature.
- Selling or buying a foreign exchange option may in some circumstances, lead to the loss of initial market funds and additional funds which may be with the broker or dealer.
- Sometimes, liquidating a position may just not be possible for eg if a currency is being deregulated.
Some analysts agree that the very nature of the market itself- being volatile, unpredictable, subject to sudden change anytime of the day or night, and more importantly not being under the control of any one person, country or institution ; is a risk in itself. However, let us take a more detailed look at the types of risks the market is subject to.
Currency risks in FOREX trading can be mainly categorized into two kinds. The first one is Transaction Risk. This refers to proper conversions of cash from one currency to another and any fluctuations in exchange rates, which could affect the trader. The second currency risk is called Translation Risk. This risk is more crucial to a businessman as it deals with accounting issues and refers to the impact of exchange rates on balance sheets and earnings. Furthermore, there are 5 types of general risks. A Market Risk refers to any fluctuation or change in interest rates, prices etc. Fluctuations in currency prices in a trading period are called Exchange Rate Risks. An Interest Rate Risk arises because of differences in the interest rates of two countries. A Credit Risk occurs when one party does not honor their side of the deal. A Country Risk occurs when the government of a country interferes in the trading markets, and reduces the currency flow. This can in turn be further divided into Economic Risk ( risk which involves the stability of a country’s economy) and a Political Risk ( risk which involves the stability of the government in charge of the country).
As you can see, all the different kinds of risks, each have their own impact on the trading market in their own way. As a trader however, there are some measures one can take in order to minimize losses from such risks.
- First and foremost, it is important to have an idea as to the kind of results you want from any investment you make, and also how many years you intend to trade in the market.
- Having a good reputed dealer who can advise you anytime is a must.
- Having a knowledge of fundamental and transactional analysis is important for any trader. Knowledge about how to read charts also is important.
- Avoiding contracts such as Future Contracts may help, as finding a partner and settling on the right price may also be an obstacle.
- There is a provision known as a Limit Order. The FOREX market is flexible enough to allow a trader to pre decide how much profits he wants to make and also to exit the market after he has achieved it. Learning when one should exit a market is important.
- Likewise, the availability of a Stop/ Loss commands should also be used. This works on the same lines as that of a Limit Order, where a trader can exit the market, once his losses hit a pre decided or fixed point.
- Analyzing any investment to be made is of prime importance. It is crucial to understand the forces acting behind the highs and lows of any currency.
- Ensure that you buy and sell, and not just either one.
- Also, keep your contacts close to you because having both a ready buyer and seller at your fingertips is important especially when you want to exit the market.
- Try trading in multiple currencies and not just in two. That way, your money would also be more spread out and chances of losses would be lesser.
- Have some extra assets in the background. This means that in case you need it, there should always be some small investment you can fall back on.
The above points can only help to some extent in making a person new to the FOREX market aware of various precautionary measures he can take. Although nobody can predict exactly how the market will go, understanding trends, being able to read reports and being aware of worldwide events are very important. It may even take years to make some profits to take home. If an experienced trader is asked what advice he would give any person just venturing into the business , chances are that he would say- “Never trade on any money, you cant afford to lose’.