Forex trading has become popular due to its high liquidity and ease of entry. It’s the world’s largest market with $6.6 trillion daily trades. But many interested traders still don’t know if it’s safe or if it comes with risks and dangers.
Forex trading isn’t entirely safe and risk-free, like any other form of trading. Light regulations, high price fluctuations, market uncertainty, and external market forces make it a risky business. Plus, finding reliable and trustworthy brokers to trade Forex can be challenging for new traders.
Further in this article, you’ll read about the potential risks you could face in the foreign exchange market. Additionally, we’ll also talk about certain tips on how to reduce risks in forex, so read on!
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
4 Types of Risks To Expect in Forex Trading
Risk means the possibility of losing your money. Every investment or trading market involves some risk levels, and you can’t expect a return without risking your money. Furthermore, every market can be either high or low risk, depending on market influences that make it volatile. Even if you have everything checked by reading all the news and events carefully, stuff happens, and things get out of hand.
It’s better to know what risks the market involves and then try to mitigate them by gaining knowledge and experience. Listed below are the four types of common risks that you should expect in Forex.
Fraudulent Brokers
The widespread popularity of Forex makes it a hub for potential bad players and fraudulent activity. Although the market is legal, the absence of tight regulations can increase its risks.
For example, scam brokers may try to manipulate the market by creating false interest in a position. To do so, they place a large order in the position without the intention of executing it.
Some brokers exploit what they know about their clients’ activities. For example, when a client wants to place a potentially profitable and big order, they execute it with their account before the client does.
Since the platforms are internet-based and all trades occur through electronic systems, some people try to rig the system using manipulative software. Brokers may even promise unrealistic returns or never pay you the wins.
That’s why you should try your best to find a reliable broker with high integrity. Make sure the firm is in line with the SEC (Securities and Exchange Commission) provisions. This way, you’ll ensure they work under transparent and compliant conditions that you can trust.
Inherent Market Risk
Forex traders make a profit through price fluctuations created by market forces. However, this high volatility can turn against you and lead to your loss at the same time.
These risks are countless and include inflation, unemployment, and economic growth within a country. Domestic policies, such as regulations and monetary and tax laws, can affect a country’s currency value. Financial announcements, political and geopolitical events, such as wars, strikes, and even natural disasters, all make prices move. And because Forex trading entails buying and selling currency pairs, you’re exposed to two countries’ events.
Traders avoid this risk by carefully following the news to stay on top of events. You should be able to interpret these developments and predict the future course of the market. That’s why taking courses and getting help from mentors is important in foreign exchange trading.
Speculation
The most important factor that makes Forex risky is the way traders place orders. After analyzing the market, reading news, and talking to Forex specialists, traders have to place their positions based on speculation. They “guess” a currency will move in a certain direction and either buy or sell their positions. It makes the game full of uncertainty with equally high potentials for reward and risk.
The best way to mitigate losing money due to this uncertainty is to start small and use stop-loss orders. This way, you make sure you won’t lose much and take your time learning the market dynamics. It’s also vital that you don’t risk all your capital. For example, it’s not rational to put all your savings in the business, gamble your car for it, or sell a property that you can never afford to buy back.
Liquidity Risk
Forex has the highest liquidity among financial markets, thanks to the vast number of traders involved. So, it’s easy to find another trader who’s willing to buy or sell the currency pair you want.
However, the market isn’t always liquid because sometimes you can’t find many traders. For example, some currencies are thinly-traded because of political instability or financial crises. Also, on some weekdays, weekends, or hours of the day, liquidity is lower, resulting in traders’ losses.
In low liquidity conditions, brokers increase the spread to make up for their losses, leading to more costs on your part. So, try to find a broker that offers fixed commissions and spreads.
To avoid liquidity risk, try to invest in the most popular currencies with lower instability. Although unpredictable events can always happen, this way, you can minimize the risk.
How To Navigate the Forex Market Risks?
Despite its several risks, Forex is still a popular venue for both seasoned and novice traders. It’s a highly liquid market with low entry barriers. Discussed below are several tips that you should consider to remain in the game and profit in this high risk market.
Enter the Market With Due Diligence
You can’t be a successful trader without knowing all the market nuances. There’s so much involved in Forex that can affect your performance. Do your homework and learn all analysis techniques and risk-mitigation strategies. Also, never underestimate the importance of a reputable and reliable broker.
Start With a Demo Account
Knowledge is power, but there’s nothing like hands-on experiences. ِHowever, don’t experiment with your actual account, or you’ll end up losing all your money.
Most trading platforms allow beginners to use a simulated account to execute hypothetical trades. This way, you can learn to avoid common errors among traders, especially due to stress and unfamiliarity with the platform.
Have a Robust Trading Strategy and Stick to It
By studying the market dynamics, you can identify the repeating patterns and devise a profitable strategy accordingly. Remember that mentors can teach you the basics of Forex trading, but they can’t help you navigate the market because every trader has different goals and techniques.
When you come up with a strategy that works for you, stick to it strictly. It’s easy falling into the trap of doing new things to see what happens. But it can simply wipe out your capital. Remember you should try to reduce risks, and playing around with different strategies isn’t going to help you avoid risk exposure.
Plus, when you have a solid strategy in place, you won’t give in to emotions. Losses and gains can both lead to unrealistic fear and greed. Trading comes with great stress, affecting your decision-making ability. Having a step-by-step plan helps you make calm decisions, even when uncertainty and stress levels are high.
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!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Whenever there’s a chance of profit-making, you should expect risks, too. The Forex market isn’t risk-free due to the high price volatility and probabilities like wrong speculation, low-liquidity, and ever-changing political, economic, and ecological environments. Country laws and trans-border regulations can also affect your trading outcomes. Brokers can also compromise your business through their fraudulent activities.
Any new trader should study the potential risks carefully and devise a robust plan to mitigate them before entering the market. A demo account is vital to get you acquainted. Also, you need insights to differentiate a reliable broker from a non-reliable one.
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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