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Foreign currency trading comes with high levels of risk. As lucrative as the business may sound, there are risks which every trader must be appraised of, before embarking on the trading journey. Foreign currency trading is one way of making money and it involves betting and shorting the values of foreign currency compared to other currencies. The risks involved including losing your money, amongst other things.
Risks Associated with Foreign Currency Trading
The primary risk associated with forex trading is caused by the fluctuation of exchange rates. These fluctuations are driven by various micro and macro-economic factors. Political events also result in the fluctuations of the foreign currency values. Natural disasters also impact the value of currencies. Some of these factors are predictable and some like natural disasters cannot be predicted. Some factors affect the value of a country’s currency positively, especially the positive factors- and some, especially negative factors have a negative impact on a country’s currency.
The buying and selling of foreign currency on the basis of economic basics like the country’s Gross Domestic Product of the current year and that of the next year carries certain fundamental trading risks. If for instance, the country’s economic outlook is positive, that country’s currency is likely to remain strong and rise against weaker currencies. The real risk here is that some economic trading fundamentals are not predictable and cannot be controlled.
Most traders use technical analysis where math-based equations are used to find patterns in the history of a currency’s price fluctuations. The risk with this type of analysis for those traders who heavily rely on them is that not all trends repeat themselves, and the indicators may be false, leading to unfavorable outcomes which a trader could not foresee. These are some risks that a forex trader needs to watch out for.
Risks Associated With Foreign Currency Trading for Individual Traders
There is a difference between trading by large investors like investment banks and other corporations, and trading by individual investors. Large banks have access to billions of dollars at their disposal which they can use to manipulate the prices of different currencies. As a result they have influence on the price of a currency and they can place high volume trades involving large amounts of money which most individual investors do not have. Individual investors are usually not privy to this information, and therefore face higher risks of losing money due to fluctuations in foreign currency trading caused by manipulation by large investors.