The growing number of FX brokers offering low capital can be the reason for the flock of traders joining the market. With this low capital investment, all you need is a computer, a stable internet connection, and a small capital to pay your broker. Above all, you need a strong trading knowledge that will be your weapon against the highs and lows of the market.
It is true that starting a Forexaccount with a broker is very easy. But, this doesn’t mean that you are free from risks. For FX traders, they see risk as losing money and even their initial deposit. In this case, it can be helpful to understand the four types of risks that might occur to you at any given time.
Understanding the Uncontrollable Market Risk
Market risk, also known as systematic risk, is the risk that traders may experience in the FX market. Unsystematic risk, meanwhile, is the kind of risk that only affects a particular market, asset, geographical region, and more. Unsystematic risk can be highly reduced through the help of diversification, it won’t work with systematic risk.
This type of market risk can be referred to as a ‘useful’ risk for a FX trader, something that a trader wants to get exposed to. To be able to generate money in the market, the prices need to move around so that you can take advantage of its differences for buying and selling.
Some of the systematic risks that can affect the prices in the market include;
- Inflation, employment, and growth figures
- Economic and financial announcements
- Elections and similar political events
- Wars, geopolitical conflicts, terrorist attacks, strikes, and natural disasters
- Changes in tax policy, regulations, and legislation.
Liquidity Risk
With a market having high liquidity, it is so easy to open or close a trading position whenever the price you are expecting is reached. Why is this so? It is because, in this market, there are a lot of buyers and sellers. But despite the fact that the FX market is considered the most liquid market in the world, there are times when the liquidity is quite low.
When a market is low in liquidity, the size of the spread mostly gets increased. Spread is the difference between a buying and selling price. Liquidity risk can lead to unpredicted situations in the market.
Counterparty Risk
Counterparty, in Forex trading, is the entity that intercedes the opening and closing of trading positions. This is also known as your broker.
The counterparty risk happens when the broker refuses to pay you maybe because of its poor regulatory enforcement or when they get bankrupt. One thing you can do to avoid such risk is to employ a trustworthy and licensed broker.
Leverage Risk
We all know that one of the greatest advantages of trading is its high leverage. However, these advantages can become a disadvantage under several circumstances.
- If the trader takes too many risks
- If the liquidity squeezes your trading cost
- If the trader chooses an overseas broker that offers high liquidity
