When it comes to liquidity and trading volume,Guest Posting the forex market is the largest in the entire world. Most of the forex transactions are based on forwards, options, forex swaps, spot transactions, and currency swaps. All these products and instruments are leveraged. Leverage is a double-edged sword. Yes, leverage gives you the power to open a large trading position with a small amount of capital, but at the same time, if the trade goes against you, you lose your initial capital and the leveraged money with the loss incurred on the trade.
There are various risks associated with the forex trade, and leverage risks just one of them. In this article, we will talk about the top forex risks that every trader must consider.
Leverage Risk
When you trade currency pairs via leveraged products, you need to put in some minimal initial investment called margin. Margin is the way to access significant trades in various currency pairs. Due to small changes in the price, margin calls take place. Margin calls require traders to pay an additional margin. During high volatility, excessive leverage can also result in extensive losses due to an excess of the initial investments. Therefore, it is very crucial that traders use leverage with utter caution and measurement. Many new traders think that leverage is a free pass to rapid and expansive profits. Well, this isn’t quite the case. Leverage surely gives you the opportunity to open large trading positions, but if these positions do not work in your favor, you end up losing your margin, i.e., your initial capital, your leveraged money, with the loss you incurred on the trading position. Therefore, leverage trading is considered one of the major forex risks for traders.
Interest Rate Risk
Another in the list of major forex risks is fluctuations in interest rates. When any institution borrows money, the lender will charge an interest rate on the loan. The rate of interest typically depends on how much risk the lender is taking. The borrowers that are considered highly risky will pay a high rate of interest on the loan. On the other hand, borrowers that entail lesser risks pay lower interest rates.