The foreign exchange market is also called the forex market and it facilitates the selling and buying of currencies throughout the world. Like stocks, the goal of forex trading is to get net profit by selling high and buying low. The traders usually have the benefit of selecting a handful of currencies over the traders of the stock market who have to go through hundreds of sectors and companies. When it comes to trading volume, forex markets are undoubtedly the largest in the entire world and due to high trading volume, forex assets are categorized as highly liquid assets. If you wish to trade the market, here are some risks that you should consider.
- Leverage risks: With regards to forex trading, leverage needs a small investment which is known as the margin. It is through this margin which gains access to consequent trades in foreign currencies. Little fluctuations in price can lead to margin calls where the investor needs to pay an additional margin. When the markets are volatile, excessive use of leverage will lead to substantial losses which will surpass the initial investments of the trader. Hence, this is a risk that you should consider.
- Interest rate risks: If you know basic economics, you will know that the interest rates have an impact on the exchange rates of the country. When the interest rates of the country rise, the currency of that country will strengthen due to the increase in investments within that country. A stronger currency will always provide high returns. On the contrary, when the interest rates fall, the currency will weaken as investors start withdrawing their investments.
- Transaction risks: Transaction risks are nothing but an exchange rate risk which is associated with differences in time between the start of the contract and the time when it settles down. Forex trading usually takes place on a 24 hour basis and this results in a change in exchange rates before the trades have been settled down. Currencies might be traded at different prices during different times. Any little difference in time will lead to fluctuation of exchange risks and this will have an impact on transaction costs.
Therefore, if you’re wondering about investing your dollars in the forex market, think twice before taking the plunge. Get help from forex brokerage firms like ETX Capital as they can help you with making the best possible decision.