Things to Think About Before Trading Forex

Forex trading, or FX for short, has become a popular investment option over the past few years for a variety of reasons.  The biggest reason for this is because it is a huge market – currencies are the most traded (liquid)  asset in the world, and as such, there can be huge profits to be had.

Many traders also like Forex because it is traded on margin, typically 1% or 100:1 leverage.    That means that with as little as $100, you could have a $10,000 currency position.  However, that highlights one of the many risks of Forex trading, which you can read below.

Things to Consider

Trading in the Forex market involves substantial risk, and here are some of the main ones.

Exchange Rate Risk: This refers to the changes in currency prices over a trading period.  Prices can change quickly, causing substantial losses if not planned for.  These risks can be mitigated by using stop loss orders.

Interest Rate Risk: This refers to the potential discrepancies in interest rates between two currencies in a pair.  Many invest in this using the carry trade, but the risk of change still remains and you can lose money on the trade.

Volatility: This refers to the risk that at some times, the currency markets can be highly volatile, with prices moving extremely quickly. This can increase the risks of you encountering a loss.

Leverage: Since positions in the Forex market are leveraged, you can take on substantial positions without requiring to deposit a large amount in your trading account.  If your position turns on you, you could be facing losses that exceeds your initial deposit amount.  That is why you need to use trading tools like stop loss orders to help you preserve your capital.

Forex and Leverage

If you want to trade Forex, City Index is a great place to start, because they can help you manage these risks.  No matter what, you need to pay close attention to your margin requirements, and place stop loss orders for all trades so that you don’t exceed your margin limits.  Positions can change quickly, and you may not be able to react as quickly.  As such, a stop loss order can save you from going broke.

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