Forex markets have the world’s highest trading volume, making them extremely liquid assets. You can say that currency swaps, forwards, spot transactions, and foreign exchange swaps are examples of foreign exchange trades. However, It carries its challenges. Although taking on some risks is unavoidable for a forex trader, having a good awareness of the risks can help you prevent large losses. You can read the following factors of risks that affect your trading.
1. Leverage Risk:
Leverage requires a small upfront investment, known as a margin for acquiring access to big trades in foreign countries. Margin calls can occur due to minor price movements when the investor is compelled to pay an additional margin. However, when markets are volatile, using too much leverage can result in significant losses that outweigh initial investments.
2. Interest-rate Risk:
Interest rates are an important factor that affects on country’s exchange rates. If a country’s interest rates rise, its currency will strengthen due to an inflow of investments in its assets, obviously because a stronger currency offers higher returns. Oppositely, if interest rates fall, the currency will weaken as investors pull their money out of the market. Because of the nature of the interest rate and its indirect effect on exchange rates, a difference in currency values can cause forex prices to change swiftly.
3. Transaction Risk:
The Transaction risks are the exchange rate risks associated with time differences between the beginning of a contract and when it settles. The exchange rate might change before trades are completed because forex trading works 24 hours a day. As a result, different prices for currencies may be traded at different periods during trading hours. The longer it takes to enter and settle a contract, the riskier the transaction becomes.