Forex is becoming more and more popular as a means of investment amongst everyday people. It doesn’t require a large amount of capital, there are many resources on the internet, and it can be both short- and long-term. What’s important to understand however, is that there are risks associated with it, and you need to understand them fully before you start putting your money into foreign currencies.
The first thing to be aware of when you’re planning on investing your money in currencies, is that they can be very volatile. Pips (the lowest decimal in a price) can change minute by minute and second by second. This means that your investment can constantly change in value, and can potentially be devalued very quickly. Anything from unexpected data releases, to important news events can move the markets, and you never know when they’re going to come.
Leverage is a method of amplifying investments. Simply put, when you deposit an amount with your broker, if you’re using leverage, you’ll be able to control a position of a much higher value than what you’ve actually invested. The idea is that you’ll then earn the benefits of a much larger investment, without tying up your capital. The thing to consider however, is that it’s not just your earnings that are scaled up. Should you be in a losing position, your losses will also increase.
How to Combat Risk
Risk may be an integral part of forex, but that doesn’t mean it always puts investors off. Successful traders are the ones who know how to reduce the chance and impact of risk. There are several ways in which this is done.
- Research is the very first line of defence. The more information you have on a position you’ve got open or are looking to open, the more you’ll be able to prevent yourself from being hit by an event. There will always be the unexpected, but make sure that there’s nothing you’re missing.
- The stop loss order is a simple, effective and vital tool that every trader should use. What it does is close out your position in the event that the price moves too far against you. You can choose where this will activate, but the idea is that it will prevent you from ever losing too much. You do need to ensure that you don’t set the order too tight however, or you won’t allow for any fluctuation, leaving you in a losing position every time the price dips a little.
The potential for forex is much greater than most other forms of investment. It is inherently risky, but with the proper research and care, it can be extremely effective. Mastering your exposure to risk is key to getting good returns. This Alpari article covers more ways in which you can reduce the chances of losing money on your position.