Foreign Exchange Rates Are They A Risky Trade?

Foreign Exchange Rates

Trading foreign exchange rates is only risky if you allow it to be. There are numerous safeguards that can be taken ahead of launching any trade. For example, if you’re faced with a volatile situation, reduce the amount of leverage that you are using to almost nothing. If it’s really volatile (and you must trade), then hedge. (A hedge is where you buy and sell a pair of currencies at the same time – for example, EUR/AUD and AUD/JPY – effectively immunising yourself from the more volatility component of the set, i. e., the AUD, in this case.) Or, you can put a “floor” under your position by instructing your trading platform to fix a “stop loss” at a certain point. Then, if your trade goes south, your stop loss will be hit and you’ll be safely out of the trade.
Using a “demo account” before you start trading “live” should help prevent your trades from becoming newbie road kill. Always trade defensively and never – ever – forget to use stop losses.

How Foreign Exchange Rates Markets Are Traded

Forex trading is supported by a world-wide network of computers that are recording all transactions (concerning approximately 80 different currency pairs) as they happen. This system is supported by a variety of organisations including Reuters and Bloomberg. Most subscribers to the system are banks, but individuals can sign up for trading quotes too. Unlike many stock exchanges, trading is almost never halted and prices are almost never retracted. (It’s possible that forex is the world’s most efficient and liquid capital market.) The prices that are reflected on your computer’s trading platform are coming from the data feed supplied by your bank or broker. Generally, they are the same as what is being quoted on the electronic system noted above.

The Risks Involved In Foreign Exchange Rates Trades

As with any investment, it is possible to lose all your money. It can happen this way: late on a Friday, you put all your cash down on 1 massive trade order involving a highly volatile currency pair, leveraging the trade as high as possible and forgetting to set any stop losses. The next day, Beijing surprises the world by announcing a new policy restricting the monthly amount of exports and your pair plummets out of the Australian sky and into the depths of the South China Sea Basin, never to surface again. Notice the danger signs: “all cash down”, “1 massive trade”, “highly volatile”, “leveraging as high as possible” and “no stop losses”. Trade defensively and this will never happen.

Making Foreign Exchange Rates Trading Work For Your Business

Exporters frequently run into foreign exchange conversion problems. Essentially, there are 3 ways to handle this matter. First, you can “run naked”, i. e., just stay in the currency that you are about to get paid in, hoping for the best. Second, you can buy (or sell) an option agreement (through your friendly hometown commercial banker) that effectively eliminates any further currency risk. For this, you will pay a fee; many companies view such costs as “insurance” against future losses. Finally, you can enter the forex market yourself and hedge the risk by yourself. This isn’t as hard as it sounds and should cost less than a bank option. Any reputable forex broker should be willing to help you.



Get a free Forex PDF PLUS:

  • 14 Video Lessons
  • Free One-on-One Training
  • A 5000$ Training Account
  • In-House Daily Analysis
Become a forex trader!

Related Posts

Free PDF and UNLOCK website features