Forex trading is considered a risky investment; therefore many are hesitant to even try. Is it the fear of the unknown, or is Forex really that scary? What are the risks involved? Are there ways to avoid the pitfalls?
To try or not to try? Those unfamiliar to forex are amazed by success stories, however many are still reluctant to give it a shot. The lack of knowledge and general understanding of what forex market is all about keeps many away.
Real Risks in Forex Trading
There is risk in everything, not just in Forex. Instead of fearing of it, I believe that it is important to learn and control the risks. The same way you won’t cross the railways when the train is closing in, or you won’t dip your hands into boiling water– you have to learn how to manage the risks in forex trading.
Below are ways to minimise the risks involved in Forex:
- Avoid Unreliable Forex Brokers
Internet is full of fraud and scam. There is always a risk of falling into the hands of bad forex broker, therefore your first step in minimizing the risk is to filter the illegal one and pick up the right broker.
The basic rules of choosing the right broker are:
- Check if the broker is regulated.
- Contact customer support via email, chat and phone. This way you can verify the ability to solve problems and provide professional support.
- Deposit small amounts to several brokers and see how the trading platform performs. If you smell something fishy, leave the broker. Even if you lose couple of hundreds, it is worth it. Once you find the right broker, you will make the money back anyway.
- Use Stop Loss.
Limit your risks, when the forex market moves against your trades. Forex market is unpredictable, and fluctuations are inevitable. To avoid losing too much, you should place limits. Your losses can be limited to 2%-5% of the invested capital. That will keep you from falling down all the way.
- Understand Advantage and Disadvantage of High Margins.
Leverage is surely beneficial feature. It gives the ability to trade online, gives liquidity to your capital and can turn hundreds invested into thousands. However, over leverage is one of the biggest mistakes in forex trading. In order to limit your risks, limit the use of high leverage. Understand that with high leverage there can make huge profits, but can also lose everything in one second.
Before you use the appetizing 1:400 leverage option, my advice is to learn all about it and practice before trading real. Free demo accounts provided by most forex brokers are very useful in order to figure out how leverage actually works. Be patient and it will pay off.
- Follow Market Conditions.
Forex market operates round the clock, however there are certain hours when the market is extremely volatile. For example, during Fed interest rate announcements, or during the first couple of hours of major market openings (for example, New York market time between 9am and 11am).
- Learn and Practice
The best way to handle Forex risks is to educate yourself. Before you even try trading via real account, find out what moves the market? How to read forex charts? What kind of indicators are there? Which indicators can you mix together? How to analyze the data obtained? Etc.
In conclusion, yes, of course there is risk involved! But what doesn’t? You can lose your job! The electricity poll can accidently fall on top of your house and burn it down! The stop market can collapse! The apartment you just bought with all of your savings can be a fraud! Your neighbour can accuse you of sexual harassment and sue you for 1 million dollars!
It is all about understanding and managing the risk. This is the real key to be in control of your own life.