with the absolute absence of risks. Business or trade comes with
opportunity of earning or with the risks of loss. The risk of loss is
even higher in Forex trade. Forex is a very volatile market. It is
known for its abrupt ups and downs. This volatile nature of Forex
trade makes it a business with full of opportunities as well as the
risk of rapid losses. It does not suit to every trader. Only a trader
who has the ability to analyze risk and minimize the risk of loss is
suitable for the Forex or foreign exchange trade.
Types of Forex Risk
There are following major risks types involved with the Forex trading:
1. Exchange rate risk;
2. Interest Rate Risk;
3. Credit Risk and
4. Country risks
What is an Exchange Rate Risk?
Exchange rate risk involves with the constant change in the prices of
currencies during a trading session. Prices can go up quickly in a
very short period of time. To avoid this sudden rise in the prices of
currencies "Stops-loss orders" mechanism is used.
What is Interest Rate Risk?
The interest rate risk is defined as the difference of interest rates
between two different currencies shown in the quote. Interest rate
risk is minimized by setting limits on the total size of difference.
For a Forex trader, a regular analysis is necessary to foresee the
changes and their effects on Forex market.
What is Credit Risk?
Credit risk is involved with the possible situation when a party does
not fulfill their indebt-ness on the closing of a deal. Bankruptcy of
a bank or financial institute may be the primary reason of credit
risk.
Country Risk
Country risk involves with the governments and their trade policies. A
Government can affect the Forex or foreign exchange trade by setting a
limit to control the flow of currency.
How to minimize the Risks:
There are numerous ways or techniques which are used to minimize or
cut the trade risks. To avoid the loss every Forex trader should have
a well thought out strategy and a firm self discipline to stick with
this strategy. Strategy should provide the scheme of exact market
enter and exit. As we have already discussed that Forex is a very
sensitive market, it get the influence from all international events
of significant importance. For a Forex trader it is necessary to have
proper plans to counter expected fluctuations. If a trader spends
money within his limits then he can feel safe. He is less prone to
loss. Proper education and Forex training is also very handy as it
enables a trader to develop profit earning Forex strategies.
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