In basic macroeconomics courses, you learn that interest rates have an effect on countries’ exchange rates. If a country’s interest rates rise, its currency will strengthen due to an influx of investments in that country’s assets putatively because a stronger currency provides higher returns. Conversely, if interest rates fall, its currency will weaken as investors begin to withdraw their investments. Due to the nature of the interest rate and its circuitous effect on exchange rates, the differential between currency values can cause forex prices to dramatically change.

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Is forex trading too risky?

Bysaif Gill

Statistics show that most aspiring forex traders fail, and some even lose large amounts of money. Leverage is a double-edged sword, as it can lead to outsized profits but also substantial losses. Counterparty risks, platform malfunctions, and sudden bursts of volatility also pose challenges to would-be forex traders.

Transaction Risks

Bysaif Gill

Transaction risks are exchange rate risks associated with time differences between the beginning of a contract and when it settles. Forex trading occurs on a 24-hour basis which can result in exchange rates changing before trades have settled. Consequently, currencies may be traded at different prices at different times during trading hours. 

Counterparty Risk

Bysaif Gill

In forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or clearinghouse. In spot currency trading, the counterparty risk comes from the solvency of the market maker. During volatile market conditions, the counterparty may be unable or refuse to adhere to contracts.