In the realm of currency trading, it is a well-known fact that most retail traders fail. Failure rates as high as 95% are mentioned in certain papers. What, therefore, distinguishes the select few?
Managing risk requires you to figure out how likely it is that your trading strategies will succeed. A forex trader must understand both technical and fundamental analysis to do that.
In addition to knowing the potential psychological price trigger points which may be determined with the aid of a price chart, you will also need to comprehend the characteristics of the market in which you are trading.
A mere 1.6% of traders are profitable day traders on average over a year. Nonetheless, these day traders represent 12% of total day trading activity, indicating their high level of activity.
Market Risk
Market risk contrasts with unsystematic risk, which just impacts a particular asset, market, industry, geographic area, etc., and is known as systematic risk, which denotes the risk inherent to the entire market. Diversification can help lower unsystematic risk but not systematic risk.
The most “useful” type of risk for a trader is market risk. In other words, anything that has the potential to affect the price of the currency pairs you are trading in the Forex market is a source of market risk.
Leverage Risk
Should you assume excessive market risk without a stop-loss, any significant losses resulting from abrupt fluctuations get amplified.
Because the spread is a function of your entire position, it gets leveraged up if a liquidity squeeze pushes your trading costs to skyrocket.
The US Securities and Exchange Commission cautions you against using high leverage for your entire investment. Since currency prices can vary in tiny increments, a lot of forex traders use leverage to increase their profits.
The leverage will increase with a lesser deposit compared to the contract’s underlying value. Large losses relative to your initial deposit can result from significant leverage if the market goes against you.
The main thing to remember about leverage is that you don’t have to use it just because it is widely available to you.
Liquidity Risk
A liquid market is one in which opening and closing trade positions quickly and easily at the desired price is the norm.
There are times when there is little liquidity in the Forex market, even though it is one of the most liquid financial markets globally. Particularly on bank holidays and weekends, or outside of the trading periods in the United States and Europe.
Brokers typically increase the size of their spreads when faced with a low liquidity situation. Recall that the difference between the purchasing and selling prices is known as a spread.
There is also a connection between liquidity risk and more erratic events. It’s the fee you give your broker in exchange for their services.
Counterparty Risk
The party you open and close trading positions with on the Forex market is known as the counterparty—your broker. The primary danger in this situation is that your counterparty will not pay you, either because of inadequate regulatory enforcement or bankruptcy.
Forex signals give novice and intermediate traders a pathway to gauging the pulse of the markets. Entry and exit locations, stop-loss levels, and take-profit levels are all included in this plan.
Trading professionals might lower their risk exposure by adhering to the plan. They can also stay away from making rash, emotionally charged decisions that could cost them.
Because it might be challenging for an individual trader to quantify this risk, they rely on regulatory organizations. A trader can trade with greater confidence if you use a reliable broker who is governed by an established body.
