Risk In The Forex Currency Exchange

By James McKee

When approaching the Forex market you must determine you risk level. After you have set aside proper funds and learned enough on a demo account to be comfortable trading you must determine what type of losses you can take. Losses are a fact of life when it comes to any sort of investment and Forex is no different. While a skilled trader will have his profits outweigh his losses, losses are still going to occur. Having the necessary capital in place to absorb those losses is important not only in keeping your account healthy but also in keeping your mind from being infected with anxiety.

Risk is anything that might negatively impact your bottom line and bearing that in mind one should always assess their risk carefully and accurately. A risk can be divided into two basic types with regard to Forex: Systematic and Unsystematic risk. Systematic risk is that which refers a large-scale change that affects multiple currencies. An unsystematic risk is one that affects a specific currency pair through a local economic problem such as supply shortage. The best way to guard against unsystematic risk is to spread your investments across more than one pair.

Default Risk refers to the risk you take by trusting your money with a particular broker, choosing one that is stable is very important to protecting your investment. Forex risk refers to knowing which events will effect the value of the currency you are trading, even if it occurs in a country different than the one whose currency you are trading. Interest rate risk refers to the chance that a hike in interest rates will adversely affect the trade you are involved in. Political or economic risk refers to the chance that a country’s politicians will intervene in regard to the value of their currency for various reasons.

This is a very brief overview of the risks associated with the forex currency exchange (which are numerous). Keeping a level head assessing your own risk on a second-by-second basis is part of what makes a great trader. Happy trading!

About the Author

Author is a Forex trader and financial analyst residing in Denver, Colorado. To stay up to date on all the latest developments in the financial world and beyond be sure to check out the forex exchange rates regularly.