Learn more about the risks associated with foreign exchange currency trading.

Forex (short for foreign exchange market) has long been a leading aspect of global decentralized trading. It comes front and center in the minds of people all around the world in regards to a general method of making money and building wealth in the quickest way possible.

In a nutshell, forex trading entails the selling, buying, and exchanging of global currencies at current or determined prices in order to execute transactions and take profits. Certainly, the scenario of being a successful forex trader is valid, since there have been so many throughout its history as a long-standing and established endeavour.

When it comes to forex, Malaysia has a fairly large community of traders with varying degrees of experience who advocate, teach and share knowledge on the widely-renowned topic. With that being said, currency trading comes with its own share of risks (as most things do). In fact, those who haven’t equipped themselves with the knowledge and know-how are prone to compromising their finances quite severely.

Here are a few known risks that should be taken note of.

#1. Legal Risks

Malaysia has its own set of rules, conditions, and laws surrounding the activities of trading, particularly forex. It’s important that you learn about the prominent and severe offenses before you continue, in order to abide by and respect the boundaries set in the country you’re in.

As legislation is hazy, you run the risk of getting into trouble with the government if you trade with a brokerage that is not on the list of licensed institutions, which in turn leads to scrutiny over all your future actions. However, most people who trade from Malaysia with their own money and an international broker will rarely, if never face issues.

You could consider this a slightly lower level risk on the spectrum, but it’s still worth mentioning.

#2. Exchange Rate Risks

The danger posed by changes in the value of a currency is known as exchange rate risk. It is predicated on the impact of constant and often volatile fluctuations in the global supply and demand balance.

During the time the trader’s position is open, it is subject to all price movements. This risk is based on the market’s judgment of which way the currencies will go based on all potential variables that occur (or could occur) at any one time, anywhere in the world. Furthermore, because off-exchange Forex trading is usually unregulated, there are no daily price caps in place compared to regulated futures markets. Fundamental and technical variables drive market movement; more on this later.

To guarantee that losses are kept within acceptable limits, the most common trading practice is to minimise losses while boosting the possibility for return. A position limit refers to the maximum quantity of any currency that a trader can hold at any given moment. A loss limit is a tool used by traders to prevent unsustainable losses by establishing stop-loss thresholds. Stop-loss orders should be always in place.

When attempting to control exchange rate risk, traders employ the concept of weighing their anticipated gains against their potential losses as a guideline. The premise is that most traders will lose twice as much as they profit, thus keeping your risk/reward ratio to 1:3 is a good rule of thumb while trading.

#3. Interest Rate Risks

Basic macroeconomics says that interest rates have an impact on country exchange rates.

If a country’s interest rates rise, its currency will increase because of an influx of investments in its assets, presumably because a stronger currency offers higher returns. If interest rates fall, the currency will weaken as investors pull their money out of the market.

The difference in currency values can cause forex prices to shift rapidly because of the nature of the interest rate and its indirect effect on exchange rates.

#4. Country Risks

When considering currency investment possibilities, one must consider the structure and stability of the issuing country.

Exchange rates in many poor and third-world countries are pegged to a global leader, such as the US dollar. To maintain a stable exchange rate, central banks must retain appropriate reserves in this situation.

A currency crisis can emerge as a result of periodic balance of payment shortfalls, resulting in currency depreciation. This might have a big impact on currency trading and prices.

It’s a given that this is why some traders keep close tabs on the political climate of countries that are associated with targeted currencies, and some even capitalise on the political or socio-economic turmoil linked to currency fluctuations.

#5. Leverage Risks

In Foreign Exchange, low margin deposits or trading collateral are usually required (just as with regulated commodity futures). These margin policies allow a lot of leverage. As a result, even a minor price change in a contract can result in quick and significant losses more than the amount invested.

For example, if 10% of the contract’s price was deposited as margin at the time of purchase, a 10% reduction in the contract’s price would result in a total loss of the margin deposit before any brokerage commissions were deducted if the contract were then closed out. A drop of more than 10% would result in the entire margin deposit being lost.

For Foreign Exchange trading, some traders may choose to use up to 100% of their account assets as margin or collateral. Traders should be mindful that using leverage aggressively can raise losses during periods of poor performance.

#6. Scam Risks

Last but not least, many countries including Malaysia are often plagued by malicious behaviour when it comes to the trading sectors.

There are plenty of scam activities or con jobs that all beginners need to watch out for. Of course, it’s not just forex that experiences these problems, but as an endeavour that offers the prospect of exponential monetary rewards, scammers try to lure in victims via methods of emotional manipulation. Get-rich-quick schemes are rampant, so be cautious if you ever feel like joining a forex trading group or pay to follow forex trading guidance.

In Closing

Forex is a massive and complex concept and traders can rely on experience gained as they build up their knowledge to achieve success. Investing will always have risks involved, so take into account all the probable issues and be sure to avoid as much of them as possible.

 

What other risks have you encountered with forex? 

 

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