Mar 20 2013
Every trader knows that there is a certain amount of risk associated with each trade he places in a financial market. Whether it is the equity market, the real estate market, the futures market or the commodities market, there is always an element of risk associated. Capable traders work towards reducing the level of risk associated with a trade to ensure higher probabilities of profit and success. However, there are no guarantees with regards to the outcome of a specific trade.
Despite the fact that every trade is associated with a specific level of risk, the Forex market is notorious for the high level of risk that a trader takes when he takes the plunge.
There are some characteristics of the Forex market that lead everyone to believe that trading in the Forex markets is riskier. Here are the main ones:
- Daily volumes – The size of the Forex market is big. To get an idea, you need only to understand that the daily trading volumes in the Forex markets are more than the cumulative of all the stock exchanges worldwide.. It is estimated that more than $3 trillion dollars exchange hands in the Forex markets on a daily basis. While this presents a large opportunity for profit, this size is one of the main reasons for high levels of risk in the market.
- Unique characteristics – There are many aspects of Forex trading that differ from those of trading in equities or commodities. For one, all quotes and prices are in the form of currency pairs since you buy one currency by making payments in another. The conceit of currency pairs takes some getting used to and can sometimes cause issues with new traders. Some traders assume that it the Forex market is a great place to trade because forex brokers do not charge any commission. Again, this is something that needs to be understood because brokers have to make their money somehow. They make it based on something called a pip.
- Minimum lots – Those who speak in favor of Forex markets state that the markets are great because brokers provide leverage to enable the trader to trade in higher lot sizes. The fact is that there is a minimum standard lot size of the base currency that needs to be invested for a single trade. This amount is not small and therefore there is the need for leverage. While leverage can be obtained, it increases the risk of a loss significantly.
- Global regulatory bodies – While there are country specific governing bodies for Forex trading, there is no single authority that manages the affairs of Forex trading across the globe. Given the global nature of Forex trading, this lack of one governing body can cause issues at times. In addition,, it increases the risk of fraud and scams.
- Fundamental changes – While technical analysis can be used to forecast the movements of currency pairs, there are a large number of factors that can affect the strength of a currency. The numbers are so large that they cannot always be fitted into an algorithm in order to understand the manner in which the currency prices will move.