Risks & Rewards of Forex Trading By Fuad Ahmed
Although Forex trading can be a lucrative business, it does come with its own set of potential risks. Experienced traders such as Fuad Ahmed have discussed various methods to reduce these risks and maximize profit. Here we will discuss some of the risks and rewards involved with Forex trading that every trader needs to know before delving into this market.
Here are some of the risks involved in Forex Trading that you should be aware about:
1. Leverage risks:
In the forex trading world, leverage necessitates that you make a small initial investment in order to make trades in foreign currencies. This is called a margin. When prices fluctuate, the trader must pay an extra margin. When the market conditions become volatile, using leverage aggressively can incur significant losses.
2. Interest rate risks:
A country’s exchange rates are affected by their interest rates. If the interest rates of a country rise, it will get a large amount of investments and its currency will become stronger. The stronger a currency, the higher the returns. However, if the interest rates decrease, its currency will become weak as traders will start to take back their investments. Because of this, forex prices can drastically change over a short period of time.
3. Transaction Risks
This is a type of risk that occurs because of the time difference between the starting and settling of a contract. Because forex trading keeps going on 24/7, exchange rates can change before trades get settled. Due to this, currencies may get traded at different trading hours at different times and different prices. Transaction risk is increased when there’s a greater time difference between starting and settling a contract.
4. Counterparty Risk
The organization that gives the asset to the trader in a financial transaction is known as the counterparty. This risk is the default risk from the broker or dealer in a particular transaction. In forex trading, forward and sport contracts on currencies do not have a guarantee by a clearing house or an exchange. The solvency of the market maker incurs the counterparty risk in spot currency trading. When market conditions become volatile, adhering to contracts may be difficult for counterparties.
Having talked about some of the risks involved with forex trading, let’s now discuss some of its advantages. Here are some of the reasons that make forex trading a lucrative market:
1. No commissions
In forex trading, you do not have to pay any brokerage fees, government fees, exchange fees or clearing fees. Retail brokers normally make money for their services through the ‘ask/bid spread.’
2. No middlemen
In spot currency trading, you can directly trade with the relevant market for the pricing on a specific currency pair. Hence, the need for middlemen is eliminated.
3. No fixed lot size
Contract of lot sizes in the futures market are depend on the exchanges. A regular silver futures contract is 5000 ounces. However, in spot currency trading, you get to decide your own position size or lot. This way, investors can take part in accounts as small at $25.
4. Low transaction costs
Under regular market conditions, the retail transaction cost is normally not more than 0.1%. The spread could even be less than 0.07% at larger dealers.
5. A 24-hour market
You do not need to wait for the opening bell. The forex trading market does not sleep, weather you’re having a Tuesday morning opening in Southeast Asia or closing in the afternoon in Australia. For those looking for part-time trading, this is a great benefit. You can decide to trade whenever you want; evening, afternoon, morning, night or even while sleeping.
6. No one can corner the market
There are so many participants in the foreign exchange market and it’s so big that one entity cannot control the price of the market for a lengthy period of time.
A large total contract value can be resulted from a small investment in the forex trading market. Using leverage, traders can earn big profits and keep their risks to a minimum.