What Are The Risks of Forex?

Leverage

Misunderstanding the use of leverage is one of the most common mistakes made by newcomers to the forex market. Leverage, of course, is one of the principal attractions of forex for many traders. Generally speaking, forex can be a relatively stable market in which price fluctuations tend to be relatively minor in absolute terms. This means that trading within a set financial budget can lead to moderate profits or losses, measured as a percentage of the opening trading amount.

Leverage, however, means that a trader’s financial exposure is magnified in terms of value, commanding a much larger stake in the market. Although this can lead to much increased profits, measured as a percentage of the opening amount, it can also lead to increased losses. Losses, in fact, can potentially exceed the opening trading amount, meaning you could incur trading debts.

A potential risk in trading forex is to follow a price trend without accurately anticipating the effect of leverage. Sudden price fluctuations, which break relatively stable trends, can occur suddenly and without warning. Leverage, in this scenario, exponentially increases the effect of a sharp price movement.

Stop Orders

The danger of magnified losses, resulting from leverage, can be guarded against by the use of stop orders. Stop orders are executed automatically, according to a predefined trading plan. When you start trading a set of currencies you can calculate a point in the market at which your potential leveraged losses become too risky. A stop order can be placed at this point and executed, either through a forex broker or your own trading platform.