Foreign Exchange Risks

Foreign exchange risks are very real to Forex traders. If you plan on trading in the Forex market, you're basically just going to have to get used to the idea that risk is part of what you do. If you are a risk-averse type of person, you might as well pack it up and go back to the penny slots.

Trading With Leverage

One of the unique things about the Forex market is that you get to trade with leverage. Not just any leverage...you get to trade with MEGA leverage. And by MEGA (sounds pretty intimidating right?) leverage, I mean somewhere between 50:1 and 500:1.

You pretty much have to trade with leverage unless you have a really large amount of money to put up. By large amount, I mean millions of dollars.

Why do you have to trade with leverage? well, in the Forex market, you make money off of the changes in the exchange rate between two currencies. The exchange rate really does not change very much in the grand scheme of things. To make any money off of this change, you have to trade very large amounts of currency units.

While this leverage can definitely help you out, it is a double-edged sword. As much as it can help, it can just as easily destroy you.

Quick Moves

When trying to figure out the basics of managing foreign exchange risk, you will also have to consider how quickly the market moves. The Forex market can move based on anything. When a news report comes out in Bangladesh about cotton futures declining, it can impact the EUR/CHF pair. Well, that might be exaggerating a bit, but you get the point. The market can move very quickly, to the tune of hundreds of pips within a few seconds. I've seen the price line on the chart go vertical for the entire height of the chart. Just so you know, it generally goes horizontally for the most part.

Unpredictable

You also have to deal with the foreign exchange rate risk that simply comes with the unpredictability of the market. No matter how much you study and how many times you trade, some things simply catch you by surprise. In these situations, you have to learn to roll with the punches.

What Should We Do?

In summary, you should run screaming from the market with your tail tucked between your legs. Ok, not really. What kind of a Forex site would this be if I told you such a thing?

You can still navigate the market, but you just need to be aware of the risks that are involved. You could very easily blow out your entire account tomorrow if you are not careful. That does not necessarily mean that everyone loses money in this market. You just have to know what you are doing and manage your money so that you do not risk too much on any one trade. Even if you are relatively sure of a set up in the market, don't bet the farm because you never know when things are going to go haywire.

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