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How risky is forex trading? Is there a way to trade forex without risk? What trades are particularly risky? How much could you lose in the worst case?
Thanks for any information on this
Greetings,
Forex trading is generally a risky business. Traders can potentially earn high profits, but they can also take heavy losses.
These are the key risks of forex trading:
1. Rate fluctuations are almost impossible to predict.
2. Forex traders generally trade on a margin. That means they borrow money on top of the money they have to invest in order to buy more currency than they could otherwise afford. This increases profits but it also increases losses. Example: You buy 50,000 francs worth of USD. You cover 10,000 francs of the cost yourself and your broker lends you the remaining 40,000 francs needed. If USD/CHF rates increase by 1% in your favor, you make a profit equal to 10% of the full 50,000 francs, or 5000 francs. If the rate decreases, you lose 10% of the full 50,000 francs (5000 francs) - not just 10% of your 10,000-franc investment.
In the above example, a leverage of 1 to 4 was used. Because fluctuations in currency rates are normally much lower than 10% (even 1% is relatively high), traders usually use much higher leverage rates to maximize potential gains. It is not uncommon for brokers to offer a leverage rate of 1 to 100 (you borrow 100 times the amount you invest). The more leverage is used, the higher the possibile gains and losses are.
3. Private traders are disadvantaged. Large financial institutions are more knowledgable of financial markets than private traders and also have the power to affect rates.
4. Emotions pose another risk. Buying or selling based on anxiety or greed can lead to heavy losses. Having a clearly defined trading strategy is advantageous. Successful traders normally have a high level of self-discipline.
You can minimize risk by using stop loss orders. If you do not already have experience with forex trading, take the time to get thoroughly informed and take advantage of the free demos offered by many online brokers to see how you perform before investing real money.
Best regards from Moneyguru
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