Forex trading is undeniably one of the most accessible options for beginners. However, the changeability of the market and the fact that Forex trades have a fairly high degree of leverage means there is also exaggerated risk. Managing risk is one of the most important parts of Forex trading, especially if you want to protect your capital. Sites like FX-List can help you to find reputable brokers that offer plenty of resources to minimize risks and losses.
Common Forex Trading Risks
Of course, the main risk of trading in any capacity is losing the money you invest, but this can happen for a number of reasons. Here are the most notable risk factors:
All markets are volatile, but the forex market can be particularly changeable. Sudden changes in the market can lead to huge gains, but also huge losses. This is especially true of forex trading because of the high leverage rate.
Often called credit or counterparty risk, this is the risk that the other person, company, or even broker that you’re working with is unable to pay you due to solvency issues.
Interest rates across the world do not fluctuate as rapidly as currency values, but you should keep them in mind. If you invest in currency used in a country with high interest rates and they suddenly cut those rates, it will impact the money that you make.
Because leverage is applied to forex trades, even small fluctuations in currency value can seriously impact the outcome of a trade. This is something you need to keep in mind when considering trades.
These risk factors may be out of your direct control, but being aware of them and planning for them is important.
Managing Risks When Forex Trading
Managing the risks associated with forex trading takes knowledge, experience, and, of course, planning. Brokers that specialize in active traders have many features that can help you to plan for and mitigate certain risks and losses.
There are things you can do independently, however. For example, you can follow the One-Percent Rule. This rule suggests that you should never trade with more than 1% of your capital or trading account in a single trade. Some traders push this up to 2%, but when starting out, it is a good idea to trade small.
Beyond this, however, you can set stop-loss and take-profit points; these are stop-gap measures that limit losses before they escalate. Of course, using these features effectively requires you to do a certain amount of research and analysis. Generally speaking, however, there are rules of thumb you can follow. For example, stop losses should be no closer than 1.5 times the current range. This will avoid a trade being executed without solid reason.