4 Foreign Currency Trading Risks and How to Overcome Them

Whether it’s because of a perceived risk or lack of capital, millennials are slow to start investing in currency trading. If they’re worried about currency trade risks, their arguments aren’t without merit or a solid foundation to stand on. However, there are always risks in foreign currency trading that can be mitigated by doing some research and preparation.

Here are 4 of the main risks that investors are worried about.

1. Higher Leverage Means Higher Risk

People love forex trading for its potential for providing high leverages, meaning you could make a lot of money. If you position yourself right, your forex broker could allow you to go as deep as 200-to-1, meaning you could take a $200 position putting down just $1.

While traders can make a lot of money from these leverages, the risks associated with a loss can be intense. Currency trading can be a way to stack up serious losses unless a trader has been managing their money like a whiz.

However, if you’re managing your money intelligently, why would you be taking such steep leverages?

2. The Market is Volatile

Forex trading can be exciting for people who are trying to make a buck fast. It can also be a nightmare for the risk-averse.

Global policy and economy changes can drastically change forecasts from minute to minute. This is a challenge for traders. They need to judge carefully, sometimes researching a market intensely before they take the plunge and invest money in the foreign exchange market.

If the market dips quickly and there’s no stop loss in place, traders could lose it all in an instant.

3. Social Trading is Big

Because so much information is so readily available, with social platforms giving market conditions, trading has never been easier.

However, social trading could damage your career. If you follow the words of an inexperienced trader, you could see a serious loss, while the other person might have much less to lose.

Make sure you’re only following experienced traders when it comes to making decisions with your money.

4. Interest Rate Risks

Interest rates vary from country to country and will have an effect on currency exchange rates.

When rates go up in a country, currency strengthens because of a perception that there’s an increased inflow of investments in a country’s assets. People will expect to see higher returns.

However, if the interest rates fall, currency weakens and people would start to take their investments out of the country and away from the currency. A sell-off would ensue, dropping prices.

Differences between currency values can cause dramatic changes to forex prices.

Foreign Currency Trading Requires Diligence

When you’re trying to make money through foreign currency trading, you’re contending with lots of people who might have more experience with you. The great equalizer is that you’re dealing with large foreign governments and the randomness of the buyers in foreign countries. So long as you pay attention, you could come out on top.

Knowing about forex signals could help you get an advantage, so make sure you’re up on the facts.

This article was written by our in-house forex traders with a combined 20+ years of experience in trading the financial markets.