Understanding FX trading risks can help you to manage them, and therefore potentially be more successful in FX trading. First thing is first, and that is important to make sure that your broker is actually authorised to offer the respective service.
Beyond that, there a number of key risks to mitigate:
Firstly, you should outline your objectives and attitude to risk in order to manage your trading expectations. Understanding what you’re looking to achieve with FX trading, will provide you with a measure to evaluate your performance.
Secondly, it is important to appreciate the risk that volatility brings to FX trading. For example, fluctuations can regularly happen and are dependant on a variety of factors including political issues, monetary policy and inflation.
Thirdly, you should understand that you are using leverage to trade. This is also referred to as ‘margin’, and this small deposit of money will allow you to trade big currency volumes. A high leverage contact will be one in which the deposit is relatively small in reference to the total value of the contract. Bigger amounts of leverage mean that the amount you can lose will be far higher if you experience an unfavourable currency movement. For example:
Assume you invest £200 with a leverage of 200, should the instrument lose 10% of its value, you will be required to pay £4000 (derived from 10% of 200 x 200). There may also be further costs associated with your trade such as transaction fees.
So you can indeed lose a lot more than you put down on deposit.
And just with any other financial product or service, it is vital to be differentiate marketing activity from legitimate and no-strings attached information. Always be vigilant when reading marketing material, and ensure that you are totally aware of all the associated fees of trading. If you are not, get in touch with the company and ask them to clearly explain all their charges.
By understand the above FX trading risks, it is hoped that you will be able to mitigate them and become a more successful FX trader. However, it is equally important to understand that you could lose far more than your original investment if things move against your trade.