Risks To Be Aware Of In Forex Market
Foreign exchange market is also known as the forex market which facilitates the selling and buying of currencies across the globe. Just like the stocks, the goal of trading in forex is to achieve net profit by purchasing at a low value and then selling at a higher value. The traders in the forex market have the benefit of picking a handful of currencies when compared to stock traders who have thousands of organizations and sectors to choose from. In terms of the volume of trading, the forex market is the largest market in the world. As the trading volume is high, the assets in the forex market are considered as highly liquid assets. Another currency market that is gaining popularity now days is the digital currency market wherein one can easily trade in digital currencies using the trading platform. You can widen your knowledge about this newly emerged market by going through crypto soft review.
The foreign exchange trades majorly consist of forwards, spot transactions, currency swaps, foreign exchange swaps, and options. However as it’s a leveraged asset, there are various risks associated with forex trading which can end up in substantial losses. Below mentioned are few of the risks one need to be aware of.
Interest rate risks- The interest rates have a great impact on the exchange rate of a country. Whenever the interest rate of the country rises, their currency value strengthens due to the influx of investments. Stronger currency offers higher returns. On the other hand, when the rate of interest falls, the currency will weaken as the investors will begin to withdraw the investments.
Leverage risks- In the case of forex trading, the trader needs to make an initial small investment known as margin to gain access to the trading of foreign currencies. Small fluctuations in price will result in margin calls and the investors are required to pay the additional margin. The aggressive use of leverage will cause substantial loss to the trader during the volatile market conditions.
Transaction risks- These risks are linked to the differences of time between the beginning of the agreement and the settlement of the contract. The trading on forex occurs on a 24-hour basis which will result in the exchange rates changing even before the trades get settled. Consequently, the currencies get traded at different times at different prices during the trading hours. The transactional risk increases with greater the difference between the time of entering the contract and the times it gets settled.