Are you considering getting into the Forex market to grow rich in no time? Forex trading has significant profit potentials that help a successful trader double their capital in less than a year. But does high profitability mean guaranteed money and no risks?
Forex isn’t guaranteed money since succeeding in the market requires a lot of knowledge, patience, and experience. The market comes with many risks that traders should manage. Leverage risk, country risk, gap risk, and spread risk can wipe out a trader’s entire capital if not handled properly.
In this article, we’ll talk about the risks of Forex trading. We’ll also outline the common mistakes you should avoid to survive in the market and make it big.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How Does Forex Work?
According to statistics, the Forex market has $6.6 trillion daily trades on average, making it the largest financial market on the planet. With 2.4 quadrillion dollars total value, it’s one of the world’s most valuable trade markets. However, 71 percent of Forex traders lose money in Forex. What’s more, 99 percent of traders cannot achieve gains for more than four consecutive quarters.
Like any other asset market, Forex may involve risks that take great knowledge and experience to avert. So, if you don’t want to fail in this high-profit market, you should commit to trading and treat it like your job, not a hobby.
Unlike the stock market, Forex is not about buying low and selling high. It requires enough knowledge about price behavior and movements. You need to predict correctly, prepare for everything, and not be afraid to lose.
6 Types of Risks Involved in Forex Trading
Like any asset trading market, Forex includes risks that impede profit-making. Consider them before entering, and plan your strategies accordingly.
Leverage risk
Leverage is borrowing money or credit that brokers give you to buy assets you couldn’t otherwise obtain. Forex has very high leverage. So, it’s equally capable of leading to huge gains or losses and acts as a double-edged sword. Traders can leverage their accounts 500 times their initial investment, but if they take excessive leverage without considering possible outcomes, they’ll face crippling losses.
Country risk
A critical caveat in Forex trading is the influence of political changes on the market. Stock markets may not be as sensitive to these changes since traders can decide by the company’s stock, but predicting currency fluctuations isn’t that easy. For example, if a country’s central bank changes its policies or a natural disaster occurs, the exchange rate can go up or down unpredictably.
Gap risk
Trading days in Forex are weekdays. So, during weekends when markets are closed, gaps occur. After they open, market indices may go up or down. That’s why Forex markets tend to be more volatile on Mondays.
Spread risk
Spreads are the fees imposed by brokerages to cover their costs. They’re the difference between the ask and bid (buy and sell) prices, and it depends on the market liquidity. The higher the liquidity, the smaller the spread.
Exchange rate risk
Perhaps this is the most inherent risk in foreign exchange trade, which involves currency value changes. The balance between supply and demand is volatile, resulting in continuous shifts in currency prices. Many factors affect the direction in which a currency’s position relative to another currency will move. The market’s perception of this possible movement creates this risk.
Risk of ruin
Even when the trader makes correct predictions about currencies’ future movements, margin calls may lead to a significant loss. So, when a trader doesn’t have enough capital to compensate for small losses in other investments, they may not bear those losses long enough to see the profits of that bet.
Other Unpredictable Problems
Technical Problems
In addition to systematic risks inherent to Forex, some one-time issues may occur that prevent traders from gaining profit.
Sometimes, losses happen due to factors totally out of the trader’s control. For example, you may fail to finalize a trade due to a system malfunction resulting from technical issues, internet overload, or power outages.
Over the Counter Market
Unlike stock markets, Forex isn’t centralized and operates over the counter. It means buyers and sellers trade directly and not through a broker or central exchange. Plus, it doesn’t have a physical location, and all trading occurs electronically.
This feature reduces middleman fees but also makes it less regulated than other markets. Since no clearinghouse guarantees Forex trades, counterparty risk can happen. It refers to a situation when one of the participants defaults on their obligations.
Both of the above problems have strong connections with unreliable brokers. If you research before choosing a broker, you can make sure they have a strong team to avoid technical problems as much as possible.
Plus, each country has regulatory bodies that brokers need to register with. For example, US brokers must register with the Commodity Futures Trading Commission or the National Futures Association.
Common Forex Trading Mistakes That You Must Avoid
Apart from potential risks, you should also avoid some common mistakes that may cause you to lose and exit the market.
Basing Trade Decisions on Emotions
Trading requires confidence and patience. Forex newbies tend to lose heart when they lose money. Seasoned traders are used to having a few big gains with lots of small losses. If you’re not disciplined to handle the emotional burden, you’ll lose big time.
Fear and greed can affect your judgment and lead to poor decisions. So, you’ll end up investing more than you can afford to lose, with disastrous outcomes. That’s why you need a robust decision-making framework based on your goals and conditions. This plan should involve strategies that help you minimize Forex-related risks.
Trying to Beat the Market
Markets evolve consistently regardless of what you’ve planned for the long-term. A big mistake is to expect everything to go as you’ve prepared for and fail to consider low-probability developments.
If you let market changes surprise you, you’re setting yourself up for failure. So, make sure to have a specific action plan for every trade to outline every move and countermove. Adapt to new market changes without fear, and adjust your strategies accordingly. This way, you can stay ahead of unexpected events and act creatively to profit.
Trying to Figure Out Everything by Yourself
Trading does require skill and experience, but you don’t need to achieve them all by yourself. Most of the time, you can’t afford to learn everything by trial and error since it can lead to big losses.
Besides, you can’t expect to achieve success without formal training and education, especially in the Forex market, which is different from other trading markets. So, find a successful mentor who can help you perfect your skills by teaching you based on their hard-earned experiences.
Having Unrealistic Goals
Seasoned Forex traders know that Forex isn’t like hitting the jackpot or a get-rich-quick plan. If you expect the market to yield unusually big profits, you may risk more than you should and end up losing your capital.
Start small, be realistic, and learn along the way. Being unrealistic might keep you from following money and risk management approaches that keep you disciplined.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Forex trading is no easy venture and doesn’t guarantee anyone’s success. It takes full-time dedication and continuous learning coupled with risks and losses to profit in this market. You should be ready for various gap, country, leverage, and exchange rate risks to avoid losing money.
Sometimes, unpredictable issues happen that are nobody’s fault but lead to your loss, regardless. For example, internet overload may lead to platform failure, and you can’t finalize your trade.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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