Forex trading is known as one of the most popular forms of trading in the world of online CFDs.
Many novice and expert investors take advantage of this relatively convenient method in order to generate potential profits from their investments. But just like in any other form of investment, there is always some level of risk involved in the process. In order to better understand these risks, one must have to fully understand the basics of forex trading.
Forex (also referred to as currency pair trading) relates to the actual increase or decrease of one currency (such as the USD-US dollar) in relation to another currency (such as the JPY-Japanese yen). In other words, we can say that what’s actually being traded is the USD/JPY currency pair, as opposed to the USD currency or the JPY currency on their own. It is needless to say then, that there are also some drawbacks to forex trading, just like with traditional stock trading.
Monitoring Risks & Factors
To be more specific: although forex trading takes the place of other top investment options and provides more than sufficient dividends to traders and investors alike, it can also be defined as a high-risk financial activity. If you are asking yourself «why», below you’ll be able to find some of the reasons for it.
For instance, great losses may be incurred, while you trade only in active and high volume stocks/futures or not sticking to plans & changing strategies, regardless if you do it via bank or using your preferred broker’s assistance. For example, let’s assume that your base currency is EUR (euro) and you trade it against USD (US dollar); in this instance, you have to be especially precise and make sure to monitor the following factors:
- The transaction process for the possibility of extra taxation — foreign interest rate risk.
- Incorrect conversion of one currency to another. In other words, make sure to avoid exchange rate risk.
- Greed or fear should never take control over your winning positions. Do not try and guess where the top and bottom of the market is, but let the market signal its top and bottom for you.
Thus, after a seemingly successful trade, you may face a great frustration of loss. We can basically assume that despite the attractive profits it may offer, forex trading also involves rapid shifts in exchange rates and requires a deep understanding of the global currencies, which are typically mutually connected and therefore, influence each other. To sum it all up, always remember that you should never trade with money that you can’t afford to lose or be too emotional when managing your open positions.
Forex Trading Tips
- Make sure you divide your capital into few equal parts (10 or more) & never risk more than 1 of these parts on any single forex trade.
- Never let your profits turn into losses. Don’t enter the market simply because you are anxious from waiting and never close a position simply because you have lost your patience.
Trade forex only within your financial capabilities and always be aware that the risk of losing is always out there.
