Forex Trading: 4 Main Risks for Beginners and Experts
August 24, 2021
Forex trading is a complex activity, requiring a certain level of knowledge and a particular mindset. Everything can be learned, of course, so even "novices" in the field can become successful traders.
Regardless of this, and the path taken, traders must face specific risks, of a purely technical nature, connected to the Forex market. Risks that deserve to be known and feared, in order to manage them in the best possible way and limit the damage.
We'll discuss this in this article, where we will describe the most important risks that are common to all types of traders (beginners, experts, professionals).
Forex Trading, not child's play
Before talking about the risks, it's important to provide an overview of the concept of "difficulty" associated with Forex Trading. Let's make things clear: Forex Trading is not child's play. It seems strange to have to reiterate this, since currency investment is a well-known activity, even in its online variant. The problem lies in the communication of certain Brokers who, more or less lawfully, paint a picture that does not correspond to reality. A picture that suggests the presence of a treasure, available to everyone, within reach.
In reality, Forex trading presents all the pros and cons, opportunities and risks of any other speculative investment activity.
Therefore, knowledge, experience, and "mental strength" are necessary to emerge. As already mentioned, everyone can learn to trade Forex, even novices. It's a matter of studying, rolling up one's sleeves, and undertaking a more or less long training path, depending on one's starting condition.
Having specified this, we can move on to analyzing the main risks for Forex traders, which involve beginners as much as experts.
Exchange rate risk
This expression refers to all those dynamics that, for various reasons, alter the balance of supply and demand and, therefore, also the value of currencies. The risk is higher when such alterations are not predictable or outside normal monetary activities. For example, an "acceptable" exchange rate risk, as it is quite predictable, is that determined by changes in interest rates that central banks make as part of their "regular" activity. In this regard, it is important to remember that central banks act on rates to keep inflation within optimal levels (but other purposes are also noted).
A less manageable exchange rate risk concerns monetary policies, but those of an emergency nature. Just think of the authorities' interference regarding the amount of foreign currency present in the economic system. Often, there is a need to intervene to prevent or resolve imbalances. Well, in these cases, the impact on supply and demand is significant, with all that follows for the analysis practice conducted by traders.
Financial leverage
Financial leverage can also represent a danger. After all, we are talking about the most famous "double-edged sword" available to traders. By the way, financial leverage refers to the tool that multiplies (for better or worse) the effects of investments. For example, with a leverage of 10:1, you invest 1000 euros, but you gain or lose as if 10,000 euros had been invested. This is precisely the point: when you earn, financial leverage benefits the trader. When you lose, it generates truly huge damages.
The risk, in this case, is overextending oneself and condemning oneself to total or partial loss of capital, with effects - in the case of beginners - that are almost irreversible. By the way, some Brokers, aware of the problem, place serious limits on the use of financial leverage. The same goes for European institutions, which prohibit "exaggerated" leveraged transactions.
Therefore, before using leverage, take all necessary precautions. In particular, leverage should be associated with a practice of money management that is as prudent as possible. In essence, you should ensure that, even if the worst-case scenario were to occur, the leverage would not lead to heavy consequences or seriously compromise subsequent activity.
Wrong strategies
Those who practice Forex Trading, like any other form of speculative trading for that matter, run the risk of adopting a strategy that is not suitable for their possibilities and objectives, and realizing it too late. It's not such a rare event, not even among experts. Obviously, the risk is inversely proportional. So, the possibility that a beginner adopts a bad strategy is really frequent.
What is meant by a wrong strategy? A strategy can be defined as such if it does not take into account the specifics of the trader, and therefore imposes objectives that are hardly achievable, outside their reach, and exposes them to capital risks that can hardly be managed. The advice, therefore, is obviously to adopt already established strategies, but to always adapt them to one's own experience, characteristics, and aspirations.
Training deficit
Normally, this risk should only concern beginners. However, it can also affect experienced traders, especially when they explore "new" waters for the first time, unrelated to what their path has been. In that case, the possibility of overextending oneself is really frequent and generates hardly reversible damage.
As for beginners, the issue concerns general preparation for trading activity. Some prejudices are widespread, such as those according to which very little is needed, perhaps a banal tutorial to start trading. There is a positive prejudice, but still a prejudice, that trading is child's play, and that a mere smattering of the rules is sufficient.
In reality, to arrive prepared for the appointment with the market, it is necessary to carry out a real training path. A path focused on theory and practice, the latter can be experienced through the many demo accounts made available. A path that involves the main areas of interest: analysis, strategy, operations, risk, and capital management.
The training process is usually not short, but that doesn't mean it's not within everyone's reach, or many. It is sufficient to put in the right amount of commitment and dedication.
