The forex market is one of the largest investment markets in the world. This is a liquid market is a place where currencies are traded, either for trade or business purposes. One of the main aspects of this international market is that there is no central place for foreign exchange. Rather, the currency trading is done electronically or via networks between traders from around the world, rather than on one centralised exchange. It is open throughout the day and at most five and half days a week, with the trading happening the major financial centres of several global cities.
As you can see, the foreign exchangetrading offers plenty of return with the right investment strategy. However, while the market does offer you plenty of benefits, there remain the risks. By being aware of it, you can ensure that you make the most of your investment while ensuring that you get optimum returns without considerable loss. Here are a few risk factors you can take into consideration:
Leveraged trading carries a high risk:You may have heard how trading with a leverage can be aprofitable route to stretch your capital. As a trader, you have the option to leverage the funds within your account and generate larger profits in accordance to the amount you invest. But while you may have an advantage, it also comes with a potential risk. With this foreign exchangetrading, your losses can also be greater than the total margin held. Hence, the reason why the leverage is often referred as a double-edged sword. But there are few steps you can take to mitigate these risks. You can identify the potential places where you can incur significant losses, especially when trading on a margin. Ensure you have a risk management plan such as the stop losses in place to prevent excessive loss.
Risks of Forex trading in multiple markets: There are plenty of forex trading around the world. By having a broad focus on several markets can lead you to miss out on the best opportunities. This normally occurs due to lack of focus. The best way to avoid this is to create a trading strategy that includes a narrow focus on a few markets. This will go a long way to monitor a suitable volatility. You can start with a shorter watch list of the forex markets. Focusing on the most liquid and volatile markets with tights spreads will be the ideal place to start.
Risks associated with a margin closeout: A margin closeout occurs when your account falls below the 50% mark of the initial margin. All your open positions will be immediately liquidatedin accordance with the current forex rates. This helps prevent any possibility of loss which exceeds your investment. In fast moving forex markets, your losses can exceed your capital. In multiple open trades, the risk of margin closeout will be high, due to the inability to follow several open positions simultaneously. To avoid this, you can reduce your account leverage; you impose a higher margin requirement on each trade. This keeps you further away from the possibility of a margin closeout.