Effectively Managing Risks Associated with Forex Trading
Before you start trading Forex, it is important that you understand all the associated risks and how to manage them effectively.
One of the main risks of forex trading comes from trading with leverage, which gives traders the advantage of making trades in big volumes that are often many times higher than their funds.
With a competent approach to the use of leverage, the profit from trading can be increased in proportion to the amount of borrowed funds used (leverage).
However, the same is true for potential losses if the market moves against you. Losses incurred when using leverage will also exceed in proportion to the amount of borrowed funds used. If only a 5% deposit is required, but the market goes against you by 10%, then you will lose twice the amount of your investment.
This trading risk associated with forex is the most common and can affect trading in any world markets, regardless of the underlying assets.
Due to the presence of volatility in the financial markets, many trading opportunities open up for traders, but this, in turn, can also carry a high level of risk. This is especially true on gaps at the opening (the boundary between closing and opening prices of trading sessions that occurred during non-business hours, weekends, holidays, night time, etc.) when traders are unable to alter the open position in some cases, accounts and positions can be closed if they fall below the closing level.
Certain volatility can be predicted on the eve of the upcoming political events or before the publication of financial reports of large corporations and macroeconomic statistics, and so on.
Other circumstances, such as natural disasters, man-made disasters, etc., are less predictable and carry a high risk in foreign exchange, commodity, and CFD trading.
In some cases, high volatility can help the markets move in your favor by moving in the direction of your opened positions while it carries huge risk if volatility acts opposite to your opened positions.
Effective management of risks
Effectively managing the trading risks associated with Forex is critical for the success of any trading strategy. There are some ways to possibly manage your risk։
- Use margin in a balanced and thoughtful way so that you have enough funds to cover any losses.
- Set a stop-loss that will close positions when the price reaches a certain level to reduce losses.
- Hedge against any other investment by shorting against your portfolio's underlying assets to reduce the risk of short-term losses.
A demo account is a good practice tool allowing you to gain further experience, try new strategies, which will help you in the future to more effectively manage your risks when making transactions with real money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.