It is quite common to think of Forex as of golden mine. With low trading costs, high liquidity and 24/7 accessibility, FX trading is a perfect instrument to diversify your portfolio. However, trading currencies can also be quite risky. In this article, we will examine all the risks associated with Forex. Let’s go!
FX trading is available using high leverage. Although it is possible to finance bigger position size with the help of leverage, high gains always go aside with potential losses. For this reason, leverage is usually called a double-edged sword. A winner can easily turn into a loser and if the stop loss is not put in the right place – one single trade can become fatal. Therefore, in Forex the top priority should be given to proper risk management, including a moderate use of leverage.
The FX market is known for its immense volatility. Since this market is global, it can be a challenging task to determine what drives the prices to change so rapidly. Political news releases or significant economic data can influence the Forex market by causing high volatility. Not only this increases the risk of loss, trading currencies in such unstable conditions can also be costly. Even the most trusted brokers might not be able to process all the pending orders in time. The delayed order execution leads to slippage, i.e. the difference between the price you desire to close the position at and the actual price at which the trade is executed.
Additionally, if you are trading with floating/variable spread, during high market volatility the spread can widen substantially.
A dreadful margin call is one of the main risks that take place in Forex trading. To explain the term, the margin call occurs when your trading account experiences deficit. Once you receive the message about margin call or margin closeout, this means that all current positions will either be reduced or simply closed. In addition, you will be asked to deposit extra funds.
The broker issues the margin call in order to avoid account liquidation. The main problem with the margin closeout is that your broker might not even warn you about it. Likewise, there might not be enough time to get the warning in a fast moving market. Thus, in Forex trading it is always recommended to watch over your account balance.
Most of the FX brokers that you can encounter are great, though there is always a chance to meet “a black sheep”. In other words, you might come across scam Forex trading brokers that are not licensed or not regulated by any reputable authority. Dealing with such frauds is dangerous and might result in the loss of the whole investment. Hence, it is vital to make the due diligence on the broker you are interested in. Eventually, this will pay off you quite well in the long run.