Forex traders can incur losses for several reasons. The market is volatile, and so much money is being invested daily. You must understand the market and the risks involved before investing your money. The following are some of the main risk factors that traders need to be aware of.
- Currency Risk
The standardised statistical measurement of currency risk is called the Beta coefficient. The Beta coefficient is used to measure the volatility of a currency pair concerning the US Dollar. You must learn how to measure risk in the foreign exchange market before trading. This will help you develop a clear trading strategy.
- Daily Trading Loss
When you start trading, you must understand what you can lose daily. If you are trading the major currency pairs, the loss can be very high if you are wrong. Take the EUR/USD, for example. If you are looking to bet against the Euro, the loss could be around £100,000 or more. On the other hand, if you want to bet on the Euro, the loss can be around £70,000 or more.
The money is low when the currency pairs are more popular, and the market is stable. However, the losses can be very high when the currency market is volatile. The recommended loss is 20-25 per cent per trade. Of course, the amount of risk should also be within your budget.
- Leverage Risks
When trading in the forex market, you can use leverage to trade. This will allow you to trade tens of thousands of pounds or more for a small amount of money. For example, if you want to trade £7,000, you can use leverage to trade up to £70,000 for a minimal amount of money.
However, you must understand the risks involved before you do this. Using leverage can complicate the situation to a large extent. If you are trading large amounts of money and do not have a reliable trading platform, your losses can be very high.
- Broker Risks
Brokers are the people who help you trade in the currency market. You should choose a broker who is reliable, trustworthy and experienced. If you are not careful about the broker you prefer, you can lose a lot of money.
There are scam brokers out there who will steal your money. Before you start trading, you should do extensive research on your broker. You should also ask other traders about the broker you are interested in.
- Regulation Risks
The government regulates the financial market. This means that some of the risks involved may not be as obvious as they seem. It is best to do some research on the regulations in the foreign exchange market before you start trading. From country to country, the regulations can be very different. If you are new to the market, you must research the country you are interested in.
This will allow you to maximise your profits and make the right decisions. You should also ask the trader you work with about the regulations. This way, you can make informed decisions.