As we said before, forex trading means trying to make money by trading money. This simply means you buy or sell different currencies on a forex trading platform, and expect that the prices will change, so that the currency that you bought will become more valuable compared to the one that you sold.
It all comes down to the basic of any trading:
Buy low and sell high.
Here is an internal conversation with me, myself and I:
Me: Is forex trading risky?
Myself: It kind of feels like trading currencies involves a lot of risk…
I: You bet it is! Depending on the currency movements and your level of education, forex trading can be very risky!
Me: What?! Very risky? What if I lose all my money trading forex?
I: Well, that is why you have to complete a forex trading education! There are ways to avoid the risk before it gets you. But in order to avoid a risk, you first need to understand it.
Forex Diva’s Guide to Risk Management
So why can forex trading be risky? The first thing that comes to mind is the risk of currency movement. Just like the stocks market, the currency market sometimes moves in an opposite direction from what you expected. That can result in losing the money invested in the market.
The biggest risk in forex trading is the tempting leverage. As we said before, leverage is a double-edged sword. While it enables you to multiply your profit, it also multiplies your losses. If you are 100% confident in your trade, you may set a high leverage to expand your return, but by doing this, you should know that you are equally expanding the risk of losing all your money and more!
This is just the beginning. The world can also add risk to forex trading. You heard me, the world! All those natural disasters, wars, terrorism and politics can have an immediate impact on the forex market. So at least for the sake of your forex account, you may want to put more energy in reaching world peace. But before that happens, the least you can do is to listen to the news and to be aware of what is going on around the globe. I mean, watching The Kardashians over and over again may be fun, but it wouldn’t do you any good to your forex account and your future luxury life.
Lack of liquidity can also bring up some risks. If you trade currencies with very low volume, you may not even be able to close your trade because the pairs just won’t move! This usually happens in the minor currency pairs. You will learn all about them in the next chapter.
What else? The last but not least of the risky stuff in forex trading is your forex broker. Other than the risk of bankruptcy, or facing a total system breakdown, they could also screw you up behind the scenes and work against your trades. That is why it is very important to choose a reliable broker. You will learn more on how to choose a broker that is suitable for you, after you have finished four full coffee pots at Forex Diva’s Coffee Break.