Forex Risk Management: 5 Forex Risks You Should Consider

Forex Risk Management: 5 Forex Risks You Should Consider

Forex market is currently the most liquid and largest market among all the financial markets. The daily Forex trading volume has reached $6.6 trillion in 2019 and the number is expected to increase by over $9 trillion. Every new trader thinks that the Forex market has everything they need: large potential profit with low investment. However, there is also a high probability of losing all the capital if you are not aware of Forex risks and how to manage them. Forex risk management simply refers to the knowledge of different Forex risks and defining the right strategy to minimize them. The reason why many traders lose a lot of money in Forex trading is not simply a lack of knowledge or hunger for profit, but also overlooking any Forex risk at the same time. 

To form the right Forex risk management strategy, you need first to understand different types of potential Forex risks in the market. 

Leverage Risk

The beauty of the Forex market, the leverage system, is also the dark side of it. Many traders open positions much larger than the deposit in their trading account thanks to the leverage. The system works really well if things go your way; however, it can also lead to lose more money than you already had and end up with a loophole.

Market risk

Market risk is the most common risk in Forex risk management. This Forex risk occurs when your market expectation does not happen and prices go in the opposite direction than you imagine. If you increase your financial literacy and become able to read the details in the market, then you partially eliminate the market risk in your Forex risk management. 

Interest Rate Risk

The interest rate is one of the most important elements of a currency’s valuation. You have to keep an eye on the interest rate announcements made by the regulatory organs controlling the currency that you are willing to trade. Any relevant change in the interest rate should definitely be represented in your Forex risk management strategy. 

Liquidity Risk

If you want to see your order executed in a very short period of time, you have to choose a currency pair with high liquidity. In case of low liquidity, there is a chance you cannot complete your transaction and you end up with losses depending on the difference between your desired trade price and the actual price. 

SEE ALSO: What is Slippage in Forex?

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