The foreign exchange market, or the forex market, is where the Top Forex Brokers 2018 buying and selling of currencies around the world mostly occur. Similar to the stock market, the goal of forex traders is to get a net profit by buying low and selling high.
The forex market grants advantages to traders who have the guts to try the market. There are a lot of benefits you can enjoy. However, there are also risks that you should definitely keep in mind. In this article, we’re going to talk about those risks.
If you’re a rookie forex trader, or if you’re planning to soon join the forex market, you should definitely read this article.
In the world of forex trading, leverage requires a small amount of initial investment, which is called the margin. You need this to gain access to substantial trades in the foreign currencies.
Small price fluctuations can lead to margin calls the occurrence of which tells you that you’re required to pay an additional margin. In times of highly volatile market conditions, aggressive use of leverage will lead to losses in excess of your initial investment.
If you’re contemplating on investing on the currency of a certain country, you need to evaluate first the structure Finance Brokerage HQbroker Review and stability of the issuing country. In a lot of developing and third world countries, the exchange rates are fixed to a world-leading currency like the US dollar.
In that kind of situation, the central bank must maintain a sufficient amount of fixed exchange rate. A currency crisis can happen because of frequent balance of payment deficits. This would then lead to the devaluation of the currency. Of course, such a thing could have a tremendous effect on forex trading and prices.
Interest rates affect a country’s exchange rates. If the country’s interest rates increase, the currency will become stronger because of the influx of investments in that country’s assets putatively since a stronger currency can provide higher returns.
On the other hand, if the interest rates fall, the currency will be weaker since investors will start withdrawing their investments. Because of the nature of interest rates and its circuitous effect on exchange rates, the differential between currency value roll forex prices to drastically change.
In a financial transaction, the counterparty is the company that provides the asset to the investor. Therefore, counterparty risk refers to the risk of default from the dealer or broker in a particular transaction,
When it comes to forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or any other kind of clearing house. When it comes to spot currency trading, the counterparty risk comes from the solvency of the market maker.
During highly volatile market conditions, there are possibility that the counterparty may become unable to refuse or adhere to contracts.
Transaction risks are a form of exchange rate risk associated with the time differences between the start of a contract and the time it settles. Forex trading is a 24-hour activity and this can result in exchange rates changing before trades have already settled.
As a result, currencies may be traded at different prices at different times during the trading hours. Greater time difference between the start and the settlement increases the transaction risk.
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