Know the Risks of Forex Trading

The Forex market is a non centralized market. Different types of risks are associated with the Forex market. These are the exchange rate risk, interest rate risk, country risk, leverage risks, scams and credit risk. Lets discuss them one by one.

Exchange rate risk
The exchange rate is the rate at which different currencies are quotes in the market. It is the rate at which one currency is quoted in relation to another currency in the market. Stop loss orders and limit orders are used to minimize the fluctuations in the currency prices over a trading period. The stop orders help you to close the currency if the prices of the currency fall beyond a certain level.

The limit order on the other hand is used to close the open position of the currency when it reaches a predetermined rate which earns profit. The stop orders when used along with the limit orders reduce the exchange rate risk to minimum.

Credit risk
Credit risk defines the risk of default by either of the party involved in the currency transaction. Bank or financial institutions becoming insolvent result in the loss of credits. To reduce the chances of credit risk it is advisable to trade in the regulated markets.

Interest rate risk
The currencies are exchanged at particular interest rate. The economic conditions in a country affect the exchange rate and the interest rate of the currency in that country. It is the difference between the interest rate of the two currencies. This differential is the carry cost that you pay to hedge a forward or future contract.

Country risk
This risk arises when the government of the country introduces some policy or takes some measures which affect the exchange rate of the currency.

Scams
Approach a certified broker to save yourself from the scams. Check if the broker is registered with the Commodities Futures Trading Commission. You can also trust a broker if he is a member of National Futures Association.

Leverage risk
Leverage increase the return but higher the amount higher will be the risk. In case the market moves the other way round against your expectations then you loose all or a large part of what you earn. Optimum level of leverage is thus what you should use when you trade in foreign exchange market.

You can minimize these risks with a proper trading strategy. Plan well when you will enter and exit the market. Use stop loss and limit order to manage the risk associated with exchange rate fluctuations. Study the market carefully before you enter the market with your savings.