Foreign Exchange market or the Forex market has extensive risk factors due to exchange rate fluctuations. The foreign Exchange market becomes highly volatile at times and makes the risk evitable. There may be multiple possible reasons and types of Forex trading risks, so let us discuss some below.
Types for Forex Trading Risk
Economic risks are the risks involved in the fluctuation of the company’s market value. The exchange rate fluctuations are majorly the reasons for the fluctuation of the overall valuation of the entire company in the market. There may be major economic conditions leading to this like government regulations, political situations, the country’s economy and so on.
Transaction risks are the risks involved during the transaction by an individual or a company. It is mainly caused due to the fluctuations in the exchange rate just before the settlement happens. The time delay may also cause major risks in transaction. The time delay between the initialisation of the transaction and the final settlement. Being a 24 hours market, risk in change of exchange rates is quite obvious.
Leverage and Interest rate Risk
If the market conditions are volatile and people use leverage aggressively then it is very certain that the person is going to encounter huge losses. During the fluctuation of the prices people may be required to pay extra margin. Now when interest rates are concerned, with the rise in interest rates, the currency of the country strengthens which in turn results in huge fluctuations.
Ways to minimize Risk in Forex Trading
Minimizing the Leverage
One of the strongest tools for investment is Leverage and if you misuse the leverage, you will definitely get into huge trouble. The market situation should always be taken into consideration while using the leverage. If you take too much leverage in fluctuating market conditions then definitely you are going to suffer huge losses if the market falls. If Leverage has the power to maximise gain, it can also maximise losses. You have to invest your own money more than the leverage to avoid the risk in the Forex trading market.
Proper setting of stop losses and take profits
It is very important to set up proper Stop loss and take profit. It is the greatest decision one has to take to maintain the position in the industry. You have to stop gambling based on your assumptions. You should set your points only when you are very sure about the market conditions. Instead you may opt for hard stop loss which is automatic and you are not required to take any step after setting up. Proper setting will enhance trade and will make you gain more.
Minimizing trade during volatile conditions
There are multiple people who would believe that you will be able to maximize profit from volatile movement of the trade. Although that is true, if you think about the profit also think about the losses. Think about the short term volatility. Think about the people who are new in this industry. It is for all those people and it is advisable to minimize your trading during this time, take a short break or minimize your position. This may help you live through the situation without any risk.
Stay focused on higher time frames
You may ask me why? There are multiple reasons. First and foremost, over trading or trading for a shorter time like day trading will not only cost you a lot of money at times, but also take a heavy toll on your profit. It is time consuming as well. The minute charts which are more volatile makes the trading at a higher position of risk and if you are trading at higher time frames then definitely the volatility and inconsistency will be less. Higher time frames will reduce your transaction cost and will help you make greater money out of it.
Setting up goals that are realistic
Setting up realistic goals is very important. If you keep on chasing some goals which are unreal then you will end up having a bad trade and suffering huge losses. If you have a firm goal and work accordingly with patience, diligence and wisdom then you will definitely achieve a great position in the Forex Trading market.
The above points we discussed will give you some idea regarding controlling risk but the major controller is you yourself. You have to come up with predetermined notions in your head and work on managing risk. If you hurry, you will never be able to achieve a great position in the industry. To become professional and exceptional in the Forex Trading industry risk management is utmost important. If you are really willing to make it big and have long term goals to fulfil then follow the steps today. Have a wonderful Trading!