With the emergence of the internet, people can now make a living out of digital services and activities in the comfort of their homes. Before, financial services like stock acquisition, forex trading, and share ownership used to be exclusive to businesses, the wealthy, and professionals. That is no longer the case today.
Forex trading and digital currency trading have become popular in the last decade. Today, many are looking into understanding how to trade forex and make it an investment source to grow funds. And though forex has a lot of financial benefits, some risks come with it.
If you’re unfamiliar with the forex market and are planning to start trading, this post is for you. Here are some risks of forex trading you should look out for.
1 – Working with a scam trading provider
One of the risks of starting forex trading is choosing a broker or provider that is illegal and a scam. Unfortunately, many fake forex brokers today operate like legal providers. Since it’s easy now to disguise and forge legal documents and regulations, many fall into scams.
Before trading with a forex broker, choose a reliable, regulated, and licensed broker to use forex trading platforms. It’s best to research the top forex brokers professional traders recommend and trust to ensure you’re on to a great start.
2 – Additional fees upon or after starting an account
If you, unfortunately, trade with a scam provider or broker, many issues will follow. One is having to pay additional fees upon or after starting an account. Usually, creating a trading account is free and won’t require any upfront fees aside from your initial deposit for your capital.
If the broker you’re trading with has a lot of additional fee requirements, it’s a sign to double-check if you’re with the right one. Usually, brokers only charge a small percentage on every currency pair you trade and transaction you do with them. Also, legal brokers would discuss their fees before letting traders open an account.
3 – Counterparty risk
Another con forex trading could have is counterparty risk. Like the first two points I shared above, this third risk relates to the trading broker you work with. Counterparty risk is when your broker goes bankrupt or fails to pay you your earnings.
It could also happen with professional and reliable brokers when trading regulations change without a warning. However, trading with them is safer and has a lower risk of encountering this because legal brokers stay updated on trading regulation changes. Traders with this risk usually trade with an unreliable trading partner. That’s why it’s critical to choose a trading broker wisely.
4 – Unpredictable market risk
Mytradingskills.com define market risk as the overall risk of the forex market. They call it a systematic risk because it does not only affect a specific country, region, or sector. They call market risk all of the factors that link to everything that affects the rate of your currency pairs.
But even though the market of forex is volatile, it also provides traders with benefits because it allows them to make profitable trades. If the market goes against a trader, they lose money. But because of that, they can also make winning trades by learning how to strategise their trading despite the market’s volatility.
5 – Liquidity risk
Forex market is one of the most liquid markets in the world. But despite being included in that list, the market still offers liquidity risk, especially to new traders. One is because there are many buyers and sellers in the market.
The forex market also encounters low liquidity spans, particularly during the holidays and weekends. It is a risk that many traders should look out for because usually, new traders have high expectations about the market. Taking note of the liquidity risk will help you understand that there are periods when you’ll have to increase your trading costs, especially during low seasons.
6 – Country risk
Last but not least is country risk. One of the best things about the forex market is you can trade anywhere as long as you have your smartphone or other gadgets. However, you must remember where you trade from could affect your currency rates.
LifeFinance.org says that economic and political stability impacts currency trading because exchange rate prices affect their rates. Third-world countries rely on exchange rates from world leaders such as the United States of America. Because of that, how central banks work in your country could affect and alter the rates of the currency you trade. Hence, it could overall impact your trading.
Learning how to manage and make those risks work to your advantage is the key.
Indeed, every financial activity comes with risks. Aside from these six points I shared, there are more that you could encounter once you start trading in the forex market. Eventually, you’ll experience at least one of these because the market is volatile. However, you can still profit despite those risks if you learn how to manage and make those risks work to your advantage.
Written by Bianca Banda
