What you need to know before you start trading currencies

0

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.

With the recent political tensions inject volatility In the currency markets, many popular currency pairs have seen exciting price increases.

Since January 13, the dollar-pound pair (USD/GBP), for example, has risen from a low of 0.72736 to a high of 0.76394, an increase of almost 6% in two months. Over the same period, the Euro-Dollar pair (EUR/USD) fell from a high of 1.14816 to a low of 1.08059, a 6% move in the opposite direction.

With growth stocks like Airbnb inc. (NASDAQ: ABNB) and Upstart Holdings Inc. (NASDAQ: UPST) are still recovering from their dramatic declines, the foreign exchange (forex) market looks more attractive than ever to many.

However, as any savvy trader will tell you, trading and risk go hand in hand, and entering new markets blindly can lead to failure. Forex markets have a long list of benefits, including greater accessibility, opportunities, and tax benefits, but they also come with a wide range of risks.

For FOREX.comthe #1 Forex broker in the United States*, it is our responsibility to ensure that all traders fully understand the risks before trading these emerging markets.

*Based on client assets according to the 2021 Retail Forex Obligation monthly reports published by the CFTC.

Forex Trading: The Risks You Need to Know

The first thing traders need to understand is that currency markets are extremely volatile.

Volatility – the propensity for drastic price changes over short periods of time – is both a trader’s friend and foe; a trader needs volatility to profit from price movements, but an irresponsible attitude towards it can lead to a significant loss. Volatile moves are a particular risk issue in forex markets, where trades are often executed on margin.

Another key element of risk in trading the Forex markets is the spread. The spread describes the difference between the bid price and the ask price for a currency pair. Generally, the less interest the currency pair has, the higher the spread risk. The major currency pairs – like EUR/USD, USD/JPY, GBP/USD and USD/CHF – are traded in high volumes, which means their spreads are generally tight, but other “exotic” pairs can have large spreads that make them difficult to manage. risk.

Diving deeper into the world of forex, traders will discover that the difficulties of leverage and prediction also significantly increase the risk of trading currencies. Due to their intrinsic links with international policies and national developments, it is difficult to predict macroeconomic events in advance. The difficulty of accurate prediction is compounded by leverage practices, which allow traders to assume greater buying power by borrowing money from others (usually the broker).

Assuming traders have been diligent enough to carry out a thorough research process on the mentioned risks, they should still consider at least one other major risk: security. Two popular forms of currency-based securities are forex and contracts for difference (CFDs), and each carries its own set of risks.

Forex trading, for example, involves exchanging one currency for another and always involves trading a uniform lot size. Forex trading is much more influenced by world events, while CFDs are influenced more by specific factors such as supply and demand changes. CFD trading also involves different types of contracts, which cover a diverse set of markets. They involve a different slice of risk than forex.

Contracts for difference (CFDs) are not available to US residents.

FOREX.com: currency trading in all its forms

The purpose of risk analysis is not to scare traders away from currency markets. A key step is to understand the risks, as frightening as they are, associated with the currency markets.

FOREX.com says it empowers traders by providing them with a wealth of information and a host of trading tools to accelerate their path to success.

Start your currency trading journey here.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.

Forex trading involves significant risk of loss and is not suitable for all investors.

picture by Ibrahim Boran on Unsplash

© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Share.

Comments are closed.