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Forex risks

There are always risks to FOREX trading, even if your broker is quite reputable. All investments and transactions meet the whole set of risks because of sudden rate changes, changing market conditions and different political events.

Many factors are the reason for these forex risks. Here are a few examples of these factors: the main company's goals, the scheme how these goals are reached, the successful company's administration that guarantees its long functioning, and the ability to oppose any force-majeure with a company's own resources.

Other constituents such as the company's length of existence, the building in the center of the town, spacious impressive office and the polite staff are not so important for success. Forex market started functioning quite lately, approximately 20 years ago. Since then, it has stood independently from other markets and largely because it is out of the exchange. Banks made up its primary participants. While communication facilities and automation were developing, banks started trading "directly" without any intermediaries such as stock exchanges. Many "classical" financiers criticize and disregard forex because there is not a single chance of limiting and regulating it legislatively inside one state. From the very start, this market became a global phenomenon. However, many European and North American banks withdraw their main income, in particular, from speculative operations on forex market whereas the number of the staff working in other market sectors is permanently decreasing.

A forex market's broker does not need any licenses and certificates for his activity because he is considered just a legal person. That is why the forex market also does not run into any "legislative limits" inside countries and in many states is equated to the games' organization.

Therefore, it is important to mention that there are no regulations for forex market, even despite of great number of complicated problems and risks (e.g. the risk connected with market prices' changes). Confidence and conscientiousness of carrying out the operations, a lucidity and marketing of forex brokers are only some of the problems associated with forex risks. However, it is important to know that broker companies cannot operate in a single stock exchange in compliance with all problems and risks in contrast to quite adaptable exchange markets.

It is necessary for any forex trader to know at least the main rules of technical analysis and reading financial charts, to have experience of studying and interpreting chart changes and indicators. This is a certain way of decreasing risk and financial exposure.

However, each FOREX transaction should be transmitted using all existing tools specially designed to reduce loss, as even the most professional traders cannot exactly predict market's future behavior. Many ways to minimize risks when placing an entry order were elaborated. Among them are different types of stop-loss orders. A stop-loss order is a special code of rules explaining how one can leave his position if the currency price amounts to a certain point. A stop loss order is placed below current market price if a person takes the so-called long position and expects the price to go up. On the contrary, stop-loss order is placed above current market price if a person takes the so-called short position and expects the price to go down.

As an example, if you take a short position on USD/CDN it means you expect the US dollar to fall against the Canadian dollar. The quote is USD/CDN 1.2138/43; therefore, you can sell 1 USD for 1.2138 CDN dollars or sell 1.2143 CDN dollars for 1 USD.

You place an order in the following way:

Sell USD: 1 standard lot USD/CDN @ 1.2138 = $121,380 CDN

Pip Value: 1 pip = $10

Stop-Loss: 1.2148

Margin: $1,000 (1%)

You are selling US$100,000 and buying CDN$121,380. Your stop loss order will be executed if the dollar goes above 1.2148; in which case, you will lose $100. However, USD/CDN falls to 1.2118/23. You can now sell 1 USD for 1.2118 CDN or sell 1.2123 CDN for 1 USD.

Still no existing institution is able to control this market for long because of the huge volume of forex. Whatever you do in the end, market forces will still be stronger; making forex one of the most open and fair investment opportunities available.

Usually one comes across prices of foreign exchange by forex quotes in pairs of currencies where the first currency is the 'base' and the second is the 'quote' currency. For instance, USD/EUR = 0.8419. Here we find out that 1 US dollar costs 0.8419 Euros. Here is why, The foregoing currency pair "transfers" US dollars (USD) into European Euros (EUR). The base currency always stands in the first place while the quote stands in the second place. Currency shows the price for one unit of the base currency.

On the contrary, the pair EUR/USD = 1.1882 clearly indicates that 1 Euro costs 1.1882 US dollars today.

With the help of these quotes, it is quite easy to follow the changes in the financial market. If the base currency is becoming stronger, the price of the quote currency rises and this fact indicates that one unit of the base currency will buy more of the quote currency. However, if the base currency loses scores, then the quote currency immediately goes down.

Usually one counts forex quotes as "demand and supply" (in the so-called "bid" and "ask" prices). The amount of money demanded for the base currency - while selling the quote currency - is called the "bid" and the price expected for the base currency - while buying the quote currency - is called the "ask" price.

How to define in the cross-currency charts which currency, the base or the quote, is on the top and which on the side? If that is the case, the broker should know at least one pair of currencies as well as which one has more value. Stop and limit orders will definitely help you to minimize your Forex risks.

Written by: Natali Ya

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