Opportunity and Risk in Forex Currency Trading
Forex Blog Articles
No great opportunity comes without significant risk
The forex currency trading market is full of chances. With every market turn, savvy traders have the opportunity to act quick and capitalized on price movements. But while a trade may look like a slam dunk from afar, risk is always lurking, one bad decision or market pull in the wrong direction.
Opportunity in Forex Currency Trading
As we briefly mentioned above, the forex market is ripe with opportunity.
If you’re considering a career in the forex market, here are the top features of trading in the market:
Ability to Go Long or Go Short
Since the forex market is commodity versus commodity, there is always the ability to go long or go short. For example, if you want to short Eur/USD, you’ll buy the dollar and pay Euro. This is short for buying the Euro and selling USD. If you want to do the reverse, that’s always possible as well.
The only times this practice might be limited is in times of crisis, when countries or managers may try to limit the amount of short selling taking place.
24 Hour Market
Traders looking to break from the rigidity of trading for an office based firm, welcome the opportunity to trade in a market that is open 24 hours a day. The constant access to the forex market gives traders the freedom and flexibility to determine their own hours and set schedules that work for their trading styles.
High Liquidity in the Market
Compared to other markets, the forex market is enormous. With over 5 trillion dollars traded daily, it is one of the biggest markets in existence. Since there is so much money moving around, liquidity is very high and traders can usually make trades at the prices they ask for.
Volatility Equals Trading Opportunity
While the forex currency trading market is not known for its volatility there are instances where the price movements of some currencies do become highly volatile. When billions of dollars are traded per minute, this instability is inevitable.
Quick thinking and well prepared traders can capitalize on these shakeups by adeptly speculating on price movements.
However, be warned, volatility doesn’t just work in one direction. The market can swing back at any moment and wipe out any and all recent gains. It’s a dangerous opportunity to play with but with a solid risk management strategy it can be incredibly rewarding.
Leverage Can Take Your Money Further
Leverage is a very tempting tool. When used properly, it can turn a little account into a big one. But go just a little bit too far and you can easily over leverage your account and destroy everything.
In forex, leverage is given in proportion to the trader’s available securities capital deposited in the trader’s trading account. For every dollar that you have available, a broker will let you use multiples of the market value.
Let’s say you have $1,000 available to you in your forex account and your broker has set your available leverage to 100:1. This means that you would have a potential market value of $1,000 x 100 which equals $100,000.
For traders who relish the idea of growing their accounts at these exponential rates, the leverage available in forex currency trading is almost too good to pass up.
Trade a Wide Range of Currencies Pairs
At first glance, it may seem like the forex market is severely limited in terms of the range of what is available to trade. After all, it’s a market that only trades currencies.
The reality is, since there are many currencies and they are all traded in pairs, this creates a very wide range of combinations that can be traded.
Hedge Your Bets
A great opportunity in forex, which allows you to protect against unwanted shifts in the market, is to hedge your bets by opening several tactical positions. And while uncertainty in the forex market is what often makes it exhilarating, hedging is a great way to make sure you’re not totally wiped out by said volatility.
In order to limit your downside risk, a popular way to hedge is to choose positively correlated pairs and take positions in opposite directions.
Outside of Seismic Events, Overall Volatility is Quite Low
Although earlier we discussed the potential to capitalize on volatile currencies, the major currencies are actually quite stable. From day to day, there is not much change of currency prices compared to the swings that frequently occur in the stock market. This relative stability offers traders a great opportunity to plan for long trades and capitalize on steady gains. The average daily change in the forex market is only between 0.3% and 0.5%.
The forex market and available platforms on which you trade are some of the most advanced market technologies available. With a high speed internet, traders can access cutting edge technology which allows them to tap into the vast market and trade high volumes quickly. Automation is also readily available and can be setup on just about any platform.
Trading on a Demo Account
Before you’re 100% ready to jump into the market with real money, you can trade as much as you want on a demo account. This opportunity allows traders to fine-tune their trading skills to the point where they’re absolutely ready to make waves in the market.
Bonuses, Promotions, and Growth
If you trade forex with a fully funded account and achieve sustained wins on trades, your skill will be rewarded with an ever growing account and access to large amounts of capital. Trading forex in this manner offers the possibility of exponential account growth.
Helpful Forex Communities
Being part of a community is a great way to get feedback for new ideas as well as an unbiased look at your past trading. A trading community also helps if you’re feeling lonely from trading solo all the time. It can be very helpful to talk to other people who are in a similar position.
Tons of Education Materials
A quick Google search reveals no shortage of resources related to educating and improving your performance as a trader. However, make sure to do your due diligence before settling on an education program. For as many great resources there are, there are plenty which offer far more than they can deliver.
Taking many of the above points all together, it’s clear that the conditions available to forex traders are some of the most friendly in the trading industry. The freedom, potential for growth, and access to capital, all make the conditions for trading forex trader friendly.
Risks in Trading Forex Currency Markets
Now that we’ve laid out all of the opportunities, it’s time to acknowledge the risk involved.
Currency Value Fluctuations
For traders who manage to take advantage of highly volatile currencies and currency pairs, currency value fluctuations might be a blessing rather than a curse. However, for most traders, sudden spikes or drops in currency value can lead to devastating losses.
Investor Types and Risk Levels
Before jumping into the forex market, it’s essential that you know what your mental strengths and weaknesses are. Part of this understanding is also knowing how much risk you’re willing and unwilling to take on. A risk management system that effectively limits your exposure is invaluable for navigating through the uncertainties of the market. Know yourself and customize your trading routine and plan to reflect that.
How Successful Traders Operate
Successful traders are those that know themselves well and prepare their trading to reflect their strengths and minimize their weaknesses. They are also very well disciplined. Good traders have time tested trading plans and no matter what the conditions, stick to their trading plans. Exhaustive preparation and strict discipline are at the core of successful career traders.
The Exchange Rate Risk
Related to the currency valuation fluctuation risk, the exchange rate risk is the result of continuous (and often volatile) changes in the total supply and demand.
While your trade is outstanding, your position will be subject to any and all market fluctuations. This risk can potentially be huge depending on which way the market decides to move.
Adding to the potency of this risk is that since most of the off-exchange forex trading is not regulated, there are no daily price maximums, limits you would otherwise find in highly regulated futures exchanges.
The Interest Rate Risk
Generated by changes in the forward spread, the interest rate risk refers to the gains and losses that come from this forward movement. The risk here is relevant to currency swaps.
In order to minimize this risk, traders have two main options. The first is to not open trades when this sort of event is occuring. The second option is to find a broker that can offer you a fixed spread trading environment.
The Credit Risk
Let’s say you’re trading with a broker on an institution and suddenly they file for bankruptcy? What happens to the money you had invested with them?
The first check on this type of risk is to make sure that whoever you are investing with is insured. Next, checkover their policy on compensation in the event of a bankruptcy.
Another safeguard against the credit risk is to make sure the institution you’re trading with has a segregated account for its investors. This ensures that the funds you’re trading with will be separate from the funds used to run the business.
The Country Risk
Standards and regulations differ from country to country. When launching your forex career, it’s important to understand all of the local laws and regulations which will be governing your trading. For example, retail traders in India are only allowed to trade internally because of fears those traders could otherwise increase inflation. Check your local regulations and make sure they work with the type of trading you’re planning on doing.
The Leverage Risk
We touched on this in the opportunities, as leverage can be a great way to grow your account quickly. However, leverage is well known for quickly getting out of control and damaging or even ruining traders’ accounts. The prevailing wisdom is to avoid leverage unless you absolutely need to utilize it or if you’re completely comfortable taking on the substantial risk.
The Transactional Risk
Since almost all of this trading is done electronically by way of machines, it is not unheard of for computer glitches to get in the way of successful execution of trades. While it is not common, occasionally there may be a delay in internet speed, a glitch in a running program, etc. Always keep your hardware and internet speed up to date, and ensure you’re running off of a reliable power source in order to minimize the risk of transaction error.
The Risk of Ruin
Sometimes traders find themselves in the position of being unable to handle short term losses. This is even if their long term outlook is solid. Traders who can’t meet the demands of short term losses will inevitably suffer big hits to their capital. Always make sure that your risk management plan allows for losses.
Forex Currency Trading – The Bottom Line
There are many great opportunities a savvy trader can capitalize on in the forex currency market. From high leverage, to custom working hours, to a wide variety of options to trade, forex traders who work hard and stick with it can have a lucrative and long career. However, like any discipline, forex trading requires an incredible amount of practice and discipline in order to minimize the risks that are also associated with the trade.
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