Forex Risk Factors

One of the first things most traders hear when they begin their forex journey is the fact that forex trading is risky. Many new traders choose to pay little attention to all the risk warnings and continue. I was personally the same at the beginning because I so eager to get started!
It is very important to fully understand the forex risk factors as to be a successful forex trader, you need to know how best to minimize them.

Perhaps the single biggest risk factor in forex trading is the use of too much leverage! I have spoken to many traders who start trading with as little as $100 on a mini forex account. I always encourage these traders not to do it and to learn more about proper risk management. $100 with a mini account will almost always have just one single outcome, a margin call.

Let’s look at why this is. If you have 100:1 leverage from your broker to open a GBP/USD position for 1 minilot is going to cost $10 in margin. This would leave $90 for trading. With a 1 mini lot GBP/USD position each pip is worth $1. This would mean that only a 90 pip movement in the wrong direction would mean result in a margin call. Also, in these 90 pips, the spread would need to be included.

GBP/USD often moves more than 90 pips in a single day.
So there we have it, one of the single biggest risks in forex trading for new traders is the overuse of leverage.

Let’s now look at some of the other risks in forex trading.

When trading forex it’s important to realize that no matter how sure you are the market will move in the way you expect, anything can happen, at any moment in time. A good example of this was when the US Government made it common knowledge that they were going to bail out Fannie Mai and Freddie Mac, the dollar appreciated considerably.

If you had an intra short on the dollar, you would not have been best pleased. This example simply illustrates that many major factors that move the market can be completed unexpected. If you can prepare your strategy to take into consideration unforeseen events, you can lower your risk. One option is to use stop losses to make sure you are always prepared for unforeseen events that could potentially move the market in a big way.

Another important thing we can do is to practice our strategies and systems thoroughly on a demo account before trading them on a live account.

In conclusion, no matter how you look at the forex risk factors, they are there and they are considerable. To be a successful trader, it important to fully understand and do everything possible to keep risk to a minimum at all times.

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