What Makes Forex Trading Risky? - For those who consider forex trading to be one of the best investments out there, there are no risks that can stop them. This is not to reduce the risks associated with investing, but rather to understand the specific reasons behind the risks and take appropriate steps to mitigate them as much as possible.
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Here are the top five reasons why the forex market is more risky than other trading markets such as stocks and commodities.
Volume
The size of the forex market is very large. The total number of daily trades across the forex market is estimated to be more than 5 trillion, which is more than the total number of trades conducted on all exchanges around the world. The size of the forex market presents huge profit opportunities. However, the chances of losing money are great. The forex market is also more volatile than other areas of trading.
Minimum Lot
To control the number of individual traders who start trading in a foreign currency, there is a standard minimum lot in the base currency that traders must trade. Most new traders use leverage to meet their minimum trading contract needs. Leverage is the ratio of the amount in your account to the amount you are allowed to trade. The amount of leverage offered by forex brokers varies. High leverage is beneficial for traders, but the risks associated with high leverage are greater.
The Basics
Forex trading is different from trading stocks and commodities. Prices are always arranged in currency pairs. This is one aspect that all new forex traders must understand. Stock traders may have been trading the market for a long time, but forex is a new concept that needs to be modified.
Forex brokers do not charge commissions from account holders. Another new concept in the forex market is the concept of pips. A pip is the difference between the selling price of a currency and the buying price of the same currency at a given broker.
No Global Governance
Forex markets are global in nature, but there is no global governing body that regulates these markets. Each country has specific regulatory agencies, but they are not linked to other agencies in different countries. Given the global nature of trading and the internet access traders and brokers allow, great care must be taken to avoid scams and scams of all kinds.
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Unexpected Volatility
Technical analysis helps traders predict the movement of currency pairs. However, currency rates fluctuate based on many other factors such as geopolitical changes, global economic conditions, changes in political parties, employment scenarios, imports, exports, and more. These fundamental changes can disrupt any trend line that can be drawn, no matter how carefully formulated.
Jay Bundall is a stockbroker and writer for FXacademy.com. Everything you need to learn about forex in one place at your own pace.