The essential idea to understand about forex trading is that it is similar to many other businesses. In financial markets there are cyclical situations, times of tranquility and other periods of more turbulence. To minimize risk, it is necessary to learn to adapt and understand that although it is not possible to control the market. You can determine when the best time to invest is or when it is better to hold off on participating in any deals. Listed below are some of the most common risks that a trader can possibly face when operating in the markets.
Position Size Risk
Risk will vary depending on the size of the positions. Often operators expose more money than they can afford to lose. When working with transactions of high levels of capital, gaining large profits is a great reward, but there is also a chance of losing significant capital. This is why it is important to know how to control the volume of operations and find a balance between profits/losses.
Movements in the market are mostly influenced by breaking news, opinions, trends and political decisions. For example, a decision announced by a central bank on interest rates. This decision is hugely influential and can cause huge gaps in the chart rapidly. Large investors in the market working through funds can intentionally generate a significant change within a particular market. For a smaller sized trader it is not possible to know all the changes before they occur, which means to minimize losses it is best to use stop loss.
It is important to remember that governments are the ones that design the laws in each country. Therefore, we must always pay attention to the rules since they can be a major reason in one of your operations failing. Attention to detail is very important during these times of change/ readjustment of monetary and exchange policies.
This is undoubtedly the greatest potential risk, due to the fact that it is very easy to second guess oneself. A good operator seeks to have a minimum efficiency of 70%. The main errors of an irresponsible trader are due to a lack of discipline and by not following their research and strategy.
Remember to consider the various external factors in your risk management strategy, particularly, those that can influence market prices, among which we can identify:
∙ Interruptions or failures in the internet connection
∙ Becoming distracted by other work related issues.
Taking everything into account, financial markets and especially FX markets are highly volatile. Due to this fact, it is important to take precautions so risks are not exceeded. Before starting an investment, be aware of how much knowledge you have within the respective market, map out the possibilities to the fullest degree and consider the risks that you can afford to take. Do not invest with any feelings of desperation, and if at the end before committing to a trade you realize that you do not have the sufficient expertise, consult independent financial advice.