Foreign exchange trade has grown and continues to expand as more people get involved. The trade is common because of the high profits that result from it. Profits in forex trade result from the fluctuations in value differences between the home currency and the foreign currency.
Although the forex exchange may be lucrative, there are risks that surround it.These risks go past a company’s nor an industry’s performance. These risks may discourage new entrants in the trade. some of the three common risks of forex exchange include the following.
1. Exchange Rate Risk
With forex trade, a forex trader utilizes the currency of one country to buy another country’s currency. Any shift in the two currencies’ relative value, which may then impact your profit or losses.
Often when a deal is entered in using a foreign currency, the values of the currencies may fluctuate between the moment the deal is entered and when it is received. The foreign currency may depreciate or gets devalued and cause you to lose money if you are not well covered.
When you choose to do forex that is purchase and sell currencies through foreign exchanges, you aredepending on the response to which foreign countries’ currencies shall have on the change in value of another country’s currency. All factors constant, purchasing a currency that ultimately increases in the value over the currency it has been paired with, results in you profiting. In the event that the currency you have been paired up with will result in you incurring great losses.
the exchange rate has a correlation with the interest rate in a country. as interest rates go up, more investments are drawn into the country. As a result, the country’s currency shall strengthen. on the other hand, falling interest rates discourage investments within the country. hence, with falling interest rates, a country’s currency weakens and loses its value. Therefore, forex traders should always be on the lookout for interest rate behavior before they get into or exit forex trading.
2. Country Risk
Country risk can be categorized into two. there is instability within a country that is a result of political turmoil. Instability within a country does not provide a conducive environment for doing business. as a result, foreign investors pull out of the country and the local investors close down businesses for fear of getting attacked, or because there is no one to buy from them.
Consequently, the county’s currency plummets and loses value. Therefore, ensure that you have not spent your money in forex trade with a country’s currencywhose value is taking a nose-dive as a result of political instability within the country.
The other category of country risk is where a country has knowingly devalued its currency. this is an expel of monetary policy that a country undertakes in order to compete more efficiently through trade. Cheaper currencies result in cheap exports. Hence, always watch out for this so that you are not caught off-guard with your forex investment in a devalued currency.
3. Margin Risk
Trading on a margin involves requesting your broker to allow you some money to add onto the little you have in your account to invest in the forex market. Therefore, you utilize leverage in forex trading, as you invest much more than is available in your actual account balance. this is very risky. In the event that the trade plummets, you experience a margin call, which necessitates you to produce more than your initial investment to get back to acquiescence.
Leveraging can heighten profits, and can also lead to increased losses. Currency markets are volatile and any slight shift in prices can result in margin calls. If your investment is greatly leveraged, you may end up experiencing substantial losses. Therefore, before you think of leveraging, consider whether it is worth it. Also, study the market with the way prices are behaving to be able to make an informed decision.
Conclusion
Foreign exchange is a lucrative venture. However, it can be a risky investment if not implemented well. The three major risks that should be considered greatly before investing in forex trade include exchange rate risk, country risk, and margin risk. Study the market well, taking the three risks into consideration, beforeinvesting in the forex trade.