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FOREX RISK

 

What is your risk?

 

It’s important to understand the risks in Forex trading before you start. Even if there is practically no limit to the profit that you can make by trading in Forex, it is also possible that you lose the money that you invest in it. Your loss is limited to your initial investment (also known as your “margin”), but of course, it’s your decision about how much money you want to invest. A good basic rule for trading is to never risk more than you can afford to lose.

 

Profit and loss – is it just currency rates going up or down?

 

You make a profit in Forex by buying a currency when its exchange rate is low and selling it when its rate is high. However, this does not limit your transactions to the case when the exchange rate is rising. If the exchange rate is falling, you can also make a profit by first selling the currency at the higher rate, and then afterwards buying it at the lower rate to honor the sale that you made.

 

In a sense, you double the number of opportunities for profit. On the other hand, you also double the number of risks of making a loss.

 

What’s the difference between hedgers and traders?

 

The difference is in their attitude to risk.

 

Hedgers want to protect themselves from risk. They don’t necessarily want to make a profit, but they do want to avoid a loss. Their strategy is to buy different currencies to balance out increases or decreases in the different exchange rates.

 

Traders accept and manage a certain level of risk, because they know that this is how they can make profit. Also known as investors or speculators, this is typically the group that you will be in.

 

How does your broker manage risk?

 

Brokers usually avoid risk for themselves wherever possible. Brokers that are “market makers” can simply charge more for selling a currency than they pay for buying it. Other brokers will charge fees on transactions that they carry out for traders, but any profit or loss on the transaction itself is the responsibility of the trader. On a trading platform, your margin is used to ensure that the broker will not make a loss. Indeed, if exchange rates are very volatile, the broker may even require that you make an extra investment known as “maintenance margin” to compensate for an increased risk of trading.