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The risks of trading forex

by , 12 November 2015

Trading the foreign exchange market all comes down to speculating on the moves of currencies.

By trading a currency pair, you hope that one currency will rise in value and the other currency will fall in value.

As the market tends to follow long-term trends, many traders use technical analysis to find trades to their gain. But it comes with risks.

So what are the risks of trading forex?

Read on to find out…


Where the risks lie with forex trading

 
The forex market doesn’t tend to be a very volatile one. It does occasionally make some large spectacular jumps, but this is rare.
 
For instance, in January, the Swiss National Bank decided that it wouldn’t peg the franc to the euro any more. This led the Swiss franc to soar some 30% against the euro. Imagine if you’d been shorting the franc against the euro when that happened?
 
But this is a rare occurrence and was the biggest one day move ever made by a major currency.
 
The common problem with forex trading comes from traders taking on far too much leverage.
 

Limit your leverage when you trade forex

 
As the forex market doesn’t tend to make massive moves, especially the major currencies, traders take on a lot of leverage to make up for this. This means you’re trading with a lot of borrowed money.
 
Some trading companies will give traders leverage of up to 500:1. But by approaching forex trading in this way, chances are you’re not going to last very long as losses will be large.
 
To deal with this issue, you should only trade with leverage up to of 10:1 or 20:1. This is far more manageable and if a trade doesn’t go your way, it won’t wipe out your trading account.
 
So there you have it. The risks of trading forex.
 
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The risks of trading forex
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