In the 21st century, everyone wants to make loads of money. Money is the source of all economic activities. Without it, no country could function properly. As this feature travels to the forex market, certain situations erupt. Although forex is a medium to make and lose money, it can drive the foreign exchange market insane. But still, the fundamental question stands strong, is investing in the forex market risky? However, before uncovering the forex risks, one must understand what the forex market is.
What is the Forex Market?
The Forex market or foreign exchange market is a global marketplace that determines the flow of worldwide currencies. Here, buyers and sellers come together (not physically but digitally) to exchange currencies at certain prices. The price of a currency keeps on fluctuating depending on the demand and supply for it.
The foreign exchange markets consist of governments, banks, corporations or hedge funds, and individuals. They trade a large volume on a daily basis, resulting in buying and selling. Factors influencing currency exchange rates include inflation and interest rate, government debt, speculation, current account deficits, and economic performance among others. The most traded currencies are USD (U.S. Dollar), GBP (British Pound), JPY (Japanese Yen), CHF (Swiss Franc), and CAD (Canadian Dollar).
3 Risks Associated with Forex Trading
Deep diving into the world of forex involves several risks associated. It can’t be undermined that the potential forex risk has to downplay profits. It can happen at any moment without any warning. Therefore, before involving oneself with currency trading, one must outline the related risks.
Volatility Risk
Volatility is a two-edged sword. It can make your forex profitability but can also bleed it. Volatility is the number one risk that is almost resonant to all markets. It mostly occurs in a bull market. When the market is strong, probably the first hiccup is volatility. Forex prices in a volatile market go haywire.
Leverage Risk
As a fundamental form of investing and trading, foreign exchange markets have the inherent risk of leverage. Leverage is an obligation that arises out of money taken from others. Others are banks and financial institutions. If leverage is not perfectly managed, it can sink the ship of forex profitability into deep water. Not leaving even a single penny.
Emotional Bias, Risk
The Forex market is made up of people. In the end, banks, governments, and corporations or hedge funds, people take the call to buy and sell. Sometimes, the market may take its toll and hamper the decision-making ability. Emotions are the basic parts of a human being. But being able to master them is not a cup of tea for everyone, especially when the times are rough. Even more so, when the financial stress is paramount, there is no way to hide. So, there is always a risk of emotional bias.
3 Benefits of Forex Trading
Benefits are an important part of forex trading. Having the knowledge to exploit the advantages in your favour is a tool to consider. Providing a ray of hope for currency trading, the following benefits are:
Liquidity
The most common problem in money markets is the availability of liquidity during distressed times. However, liquidity is not a problem in currency trading. It allows plenty of liquidity flow relentlessly. Executing millions and billions of trades in almost a month is a pivotal trait of the forex market.
Diversification
The old saying “don’t keep all your eggs in one basket” is true in currency trading. Diversification is probably the most paramount practice to master for all traders. It relieves the forex risk and reduces stress. If one trade doesn’t go as planned, the second or the third might go in the favour of the trader. So keep diversification, enabled.
It is Available 24/5
The best advantage currency trading possesses is its availability. For example, if a trader is not able to participate in forex trading during the morning hours, the possible alternative is to trade during the evening. It allows the trader with ample flexibility to participate.
But before skipping to investing altogether, people must know what affects forex.
3 Factors to Know Before Forex Investing
There are plenty of factors that affect the forex market. Even allowing yourself a chance to make serious money, requires a basic understanding of these factors. These factors must be studied from a curious point of view. So, the factors to know before forex investing are:
Geopolitical See-Saw
Participants may not realize that geopolitics is a major game changer. It can swing the tide in anyone’s favour. Taking the recent example of the Russia-Ukraine war, almost every nation restricted its trade with Russia but Russia had enough oil and gas reserves, which ultimately appreciated the RUB (Russian Ruble). So, banking on these opportunities could be vital.
Fundamental Analysis
It is the basis of studying the forex market. Having the fundamental knowledge of how the market works, its intricacies, and major fault lines will help you to go long. If you don’t know how the forex market works, then you’ll not be able to take advantage of the opportunities presented. Therefore, the fundamental analysis could prove to be a major reliable game changer.
Technical Analysis
Technical analysis is the knowledge of charts, plotting relevant forex indicators, and analyzing the possible outcome. It involves varied candlesticks and patterns that form a currency. A belief technical analysts understand is that “history repeats itself”. It is a crucial element of the forex market. It allows trends to persist on charts, helping investors to pre-determine the market movement, hence benefitting from it.
Conclusion
The foreign exchange market is a diverse market to be in. Currencies range from INR to USD, anyone can choose whatever currency they want to buy and sell. It is evident that it can fill the appetite of almost every investor. If we look at the forex market from the lens of risk, yes forex risk is inherent with forex investment. However, by following the guidelines, like knowing the risks, varied benefits, and how the foreign exchange market works could alleviate the risk.
Frequently Ask Questions (FAQ’s)
Q)What is leverage, and how does it impact risk?
Ans) Well, the amount is specific to the trader. The more risk-averse a trader is, the less capital he should start with and vice-versa. But understand, risk-taking is inherent, so trade wisely.
Q) Is forex trading suitable for beginners?
Ans) Absolutely. Just understand that everyone who has traded in forex till now was a beginner. So, everyone starts as a beginner and if successful makes their way up the ladder.
Q) What are the common mistakes to avoid in forex trading?
Ans) Common mistakes to avoid in forex trading are understanding the risk, instilling knowledge of the forex market, not being overleveraged, and diversification.
Q) How do geopolitical events affect currency markets?
Ans) Geopolitical events can affect the currency markets. Looking at the recent example, The Federal Reserve raised the interest rates, which appreciated the USD. Hence, banking on bullishness would be a profitable trade.
