The volatile and chaotic nature of the Forex markets suggests that market participants are facing both enormous opportunities to make profits and prospects of incurring massive losses. Financial activities in this complex market are associated with a large number of risks, which every trader, beginning and experienced alike, must be aware of before making any Forex investment plans.
It would not be an exaggeration to say that, as an FX trader, your primary responsibility is that of a risk manager. As such, you would be dealing with a huge number of risks every day, so this breakdown of some of the most tricky risks will definitely come in handy.
1. Risk of making poor decisions due to the lack of education and know-how
Unlike most other risks, this is the one you can directly control. Investing heavily in your education and skill set is one of the best risk mitigation strategies. It is your major responsibility to ensure that you come fully prepared to address the challenges of Forex trading.
There is a variety of ways to enhance your trading background, and one of the most effective ones is to maximize the opportunities your broker offers. Reputable brokers prioritize their clients’ success and often offer comprehensive learning resources. One of the notable examples is Larson & Holz, a Hong Kong-based brokerage servicing global audiences. L&H offers its clients a remarkable collection of invaluable educational materials, centering on the following topics:
● market analysis in Forex trading;
● trading strategies and psychology;
● technical indicators;
● CFD, stocks and Forex ebooks and a glossary.
When both you and your team take the time to go through such resources, such effort translates in an in-depth understanding of the very nature of the Forex markets, cash flow Forex trading and all the risks that go hand in hand with them.
What are the advantages of Larson&Holz?
It is necessary to obtain a license to be able to operate officially on the territory of Russian Federation. Since Larson&Holz has such a license, you can completely rely on this company and trust it your funds. Forex market is the main area of business operations for Larson&Holz. You can use such instruments as contracts, futures, stocks and other securities to expand your trading activities. However, currency pair are the major instrument for Larson&Holz.
The company also provides excellent training and professional advice free of charge. Note that training is conducted on working days only.
These are not the only advantages of cooperating with Larson&Holz. The most attractive feature is an interesting partner program the company offers.
2. Political risks
Change of official policies and governments can have a profound impact on Forex markets, particularly on spot markets. Emerging and dying economic or political alliances affect economic expectations and can contribute to rising risks.
Pre-election and election months are the most volatile due to the highest uncertainty in a society, which inevitably affects the exchange rates. Economic policies of the candidates give some clues about the upcoming policy directions, and in the first post-election weeks panic is not an uncommon situation across Forex markets. In most cases, it fades away rather quickly, though, after the political situation stabilizes.
While, as a trader, you do not have control over the sweeping political processes, your best strategy to mitigate political risks is to constantly monitor global, regional and national political landscapes and be aware of the upcoming changes in order to adjust your trading strategies.
3. Risk of interest rate fluctuations
Interest rates in the countries are set by the central banks as part of the national monetary policy. Note that currency exchange rates and interest rates are interconnected and you can gain valuable market insights by monitoring these indexes.
For example, you can figure out which assets receive the largest investments from lenders by keeping track of fluctuations of the interest rates. Ultimately, the interest rate itself is defined by the risk the lender accepts when lending the money. Borrowers with a high-risk profile have to pay higher interest rates for their loans, and vice versa.
4. Credit risk
Credit risks occur when one party to a transaction is not able to follow through on its contractual obligations and pay the other party. Oftentimes, one of the parties can go bankrupt in the midst of trading.
As a risk manager, your job is to identify partnerships that carry the highest credit risk before the trading occurs. This task goes hand in hand with your choice of broker. Reputable brokerages hold the reserves, which ensure that their clients do not incur losses due to the other party’s insolvency.
5. Risk of currency devaluation
Countries that use fixed currency exchange rates often utilize devaluation as an instrument of their monetary policies. Why would they do it? Primarily, to avoid trade deficits and imbalances. Cheaper national currency makes the country’s exports cheaper and, therefore, more competitive globally. One can guess that such fluctuations present significant foreign exchange risks in the Forex market.
Yet another risk that devaluation can cause is psychological, which can lead to higher market volatility and false expectations. Adjustment of the currency exchange rate can be viewed by market players as a signal of an upcoming crisis or weakness in that country. To mitigate this particular type of risk, be aware which countries utilize fixed currency rates so you can resist the general panic and make educated trading choices.
6. Operational risk
As a trader with a team, you must be aware of the various risks associated with daily management and people. Security and compliance with legal requirements are part of this risk as well. A robust and experienced management team is a risk prevention measure in its own right, although it does take time and effort to build it.
It is in your interest as a trader to create a thriving environment and ensure that your team is working productively. It is one of those rare risks that you have some degree of control over, so it is within your grasp to mitigate it effectively.
7. Margin, or leverage risk
Marginal trading enables market players to use leverage. When opening a trade in the Forex market, traders typically place a fraction of the total contract value to signal their goodwill and commitment to follow through their contractual obligations. This upfront deposit which they must place is called margin. The underlying risk here is that the contract price might decrease by the time the contract is closed, leading to a partial or complete loss of the margin deposit.
At all times, remember that aggressive leverage is a bad strategy that can cause even more risks.