Risk in trading is a situation where your investments don’t perform upto a level or The value of investments fall or you lose money or lose.
Types of Risk:
There are three types of risk in forex trading:- Economic Risk, Transaction risk and risk of scam. Let’s talk about every risk and how they affect the forex market:-
Economic risks are types of risks that occur due to economic releases, news or forecasts. These events, release and forecast cause changes in the price of currency and the market are highly volatile due to this.
Example:- News related to GDP drop will cause a drop in the domestic currency price.
Transaction risk is a type of risk that occurs during a transaction. The risk arises when a transaction takes time because the market is volatile, and the currency price might fluctuate between the transaction and settlement.
For example:- If you are dealing in Canadian dollars(CAD) from Europe and if the price during the exchange was 1.50 and then it falls to 2.50, then there will be a direct loss of 100 euros to the buyer.
Risk of scam:
With a massive number of participants in the forex market, the chances of fraud increase as there is a huge demand, which opens up opportunities for opportunists to scam. Opportunists in the market try to take advantage of every situation. Some experienced traders and brokers are opportunists. You have to be very careful while trading because if you follow them, then you might lose money. Brokers scam by giving wrong advice, making bad decisions, and making decisions in their favour.
Risk of jumping blindly :
Some traders jump in blindly without planning, and the situation results in a loss. So if you don’t have knowledge, plan, if you don’t use stop loss/ take profit and be realistic, then trading is not for you because you might lose money and quit early.
Risk of using leverage in wrong way:
Leverage is a powerful tool, but with power comes responsibility. If you are not mindful of the level of risk that comes with it, then you might lose money because the increase in leverage is equal to the rise in the level of loss.
Risk management in forex:
Every type of investment has a risk. You can counter that risk or reduce that risk by following a few steps that can save your time and money. Here are the following steps to protect from future risk:-
Experienced traders and brokers fool beginners. They mislead beginners by giving deals that favour them, making decisions for them, giving wrong advice, and others. The solution to this problem is research. You must conduct proper research and study. Your knowledge and awareness will increase, and it will not be easy to fool you. Make your own decisions and take control of the situation. Don’t get influenced by opportunists.
Use stop loss and take profit:
Not placing a stop loss/take profit level is a common beginner mistake. Due to this mistake, you lose the opportunity to gain profit, and you end up taking more loss than you expect. Beginners make this mistake, lose money and quit. To avoid this problem, you must place a level to bear a loss and a level to exit position. This technique will reduce the level of risk, and the level of profit will increase.
Limit the amount of risk:
A Common phrase don’t bite more than you can chew is perfectly applicable here because you have to be mindful about the level of risk you want to take. If you take too much risk, you might lose all the investment, and the worst case is that you lose more than what you invest. To solve that issue, you need to understand the risk level and limit the amount of risk. This technique will reduce the bumps in your trading journey.
Use leverage in a limited manner:
Leverage is used to increase yields, but this can turn against you because the level of loss also increases. High leverage is equal to high risk, or an increase in leverage equals an increase in risk. Therefore, you should use the leverage in a limited way to limit the level of risk you take.
You can’t earn a massive amount of yields in one day, and you can’t be a billionaire in one day. So you have to be down to earth and understand that it’s a slow rise to the top. You have to be realistic and don’t take unnecessary risks because if you do, you will lose everything.
Before entering the market, there must be a concise and robust trading plan to reach your trading goal. Working without a plan and moving in a haphazard manner increases the risk of losing money. You don’t have to make a plan for the next 20 years at once. Start with trading plans for a day, and then you expand it.
Prepare yourself for the worst-case scenarios:
The trading journey is a bumpy ride, and you have to prepare for it because every day is not a good day, and that’s why you must be prepared for bad days and the worst-case scenarios. Make alternate plans if one fails and be mindful of all the future risks.
There are numerous risks in forex trading. To manage these risks, you have to be prepared for the worst case, make trade plans, be realistic, use leverage in a limited manner, Use stop loss/take profit function and have proper research. You can manage risk if you are aware and ready.