Risk of Forex Trading: How dangerous is it?

Forex trading is not recommended for beginners but is mainly intended for professionals, which does not mean that inexperienced traders have no way to get started. Before one takes part in forex trading, one should simply deal intensively with the topic.

The forex trader must be aware that not only extremely high and fast profits can beckon, but also the total loss of capital. Even for very experienced market players, who are very well versed, a high risk remains, but it can also be very rewarding. In the following, we would like to draw your attention to the risks involved in foreign exchange transactions.

History of the Forex market

Foreign exchange trading has existed since people started trading over long distances. Even in ancient times, very simple currency exchanges were carried out on the basis of the weight and material of the coins. Where people from all over the world met and traded, they also exchanged their currencies.

The importance of Forex

Forex stands for “Foreign Exchange Market” and means nothing other than trading foreign currencies. The same is meant when talking about the FX market or the currency market.

It is the largest market in the world and has a daily turnover of more than 5 trillion US dollars. On the forex market, traders can buy or sell foreign currencies. Even the exchange before a holiday trip is such a business. The five major currency pairs in forex are

  • EUR/USD,
  • USD/JPY,
  • GBP/USD,
  • USD/CHF and
  • USD/CAD.

It is noticeable that in all currency pairs, one half is provided by the dollar. This is due to its outstanding role as the world’s leading currency. Most commodities are traded in dollars, most currency reserves are in dollars and it enjoys the most confidence among investors.

Where and by whom is forex trading done?

Since the forex is not traded at a fixed trading place, but on the Internet, virtually anyone can participate in currency trading from any location with Internet access. There are a variety of FX tools available for this purpose. They are available for PCs or as a browser plug-in and as a smartphone app. They help to simplify forex trading so that everyone can participate in forex trading.

But here lies the danger. Forex trading is not recommended if you have not studied the mechanisms of the market and forex strategies in detail beforehand.

High risks are immanent in foreign exchange trading, so laypersons should rather refrain from the idea of hoping for big profits on the FX market even without a great deal of expertise. A currency generally loses value against all currencies. If a trader has now bought various foreign currencies, the loss is immediately noticeable on all sides. This is why most market participants in forex trading are banks, trading houses, companies, or professional currency brokers.

Trading hours are based on the four main trading hours. The opening hours of the New York, London, Tokyo, and Sydney markets are taken into account. So from Europe, you can access the market from Sunday 22:00 to Friday 23:00. During the week, traders can trade forex almost 24 hours a day. On weekdays between 13:00 and 17:00 hrs is a particularly attractive time, as the stock exchanges in Europe and the USA are open at the same time.

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What exactly is the risk?

The risk in the FX market is that it is highly speculative. Even if all available sources are taken into account, it is difficult to make a reliable forecast of price developments. The market is too volatile and many of the almost countless influencing factors cannot be predicted. Although the liquidity of the market is immense and the chances of returns are high, in practice profits are subject to strong fluctuations.

As mentioned above, the factors that influence exchange rates are many and varied. Before it happened, few would have expected the outcome of the Brexit referendum or that Donald Trump would win the election for President of the United States. The markets reacted promptly to both events. During Trump’s presidency, the dollar fell massively in value.

It should also be remembered that most price movements are in the rear decimal range, the pips. In addition, there are always fees for the broker who makes access to the market possible in the first place. The additional costs should therefore be considered carefully. Nevertheless, extremely high profits can be made due to the high leverage. Here, too, the following applies: the larger the stake, the greater the leverage. Nevertheless, the risk should be classified realistically.

Caution, obligation to make additional contributions!

Some forex brokers have provided for a so-called obligation to make additional contributions in their general terms and conditions. This means that in the case of a wrong decision, the trader is liable for the losses of the leveraged products beyond the investment made.

The leverage effect, which on the one hand ensures that one can get started with relatively little starting capital, also carries the risk of backfiring. The high profit option is mirrored by the one on the loss side.

This can be quite expensive and with a 500 € stake and 200 times the leverage, it can also be life-threatening. Fortunately, the number of brokers who explicitly exclude this risk is increasing.

Then the so-called margin call does not mean that the broker is obliged to make a margin call, but only that the broker gives the trader the opportunity to increase his security deposit in order to hold the position before the deposit amount is exhausted. This in turn is one reason why forex trading is gradually becoming more secure.

Time factor

The time required for FX trading is very high. Although brokers usually help to develop a profitable strategy, the trader has to spend a long and intensive time on foreign exchange trading before he can participate successfully.

Beginner’s luck is not very widespread among traders, the market is too complex. In order to minimize the risk, it is recommended to open a demo account with a broker beforehand to slowly get a feel for currency trading. After some time and with more experience you can then switch to real money.

What can help you to become a better FX trader?

The best thing is still to act responsibly by the trader:

  • He should never invest more than he can bear in case of loss.
  • He should buy currencies at low rates and sell them at high rates. What sounds so easy always causes problems for traders. However, if a currency is very low in comparison, this fact alone will usually fuel demand for it and thus lead to a rise in price. This way, one can sell at a profit.
  • It is best to choose a broker who has excluded the obligation to make a margin call in his terms and conditions.

If you follow the rules and put some control mechanisms in place, you can make good profits in forex trading without too much risk.

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