All companies or individuals that perform part of their business in a different currency are subject to some Forex currency risks (or exchange rate risk or foreign exchange risk). These risks takes place whenever a company’s cost currency is different from its sale currency. On the other hand, whenever a company has revenues and expenses in the same currency, it doesn’t experience any exchange rate risk. The Forex market involves different types of risks including: interest rate risk, credit risk, country risk, and Exchange rate risk.
Any investment is risky, but when it comes to trading off-exchange Forex contracts, risks are even much larger. Thus any potential investor must consider all the possible risks that might result from different decisions made for investing. The following section discusses the different risks of Forex trading:
Forex scams were occurring very frequently few years ago. It is always essential to consider evaluating the broker’s background before signing up any documents. Authentic Forex brokers usually work with huge financial institutions such as banks, and insurance organizations. They are officially recorded with the government agencies.
Losing the whole Investment
Forex dealers ask investors to deposit an amount of money called the “security deposit” or “margin”, in order to purchase or sell an off-exchange Forex contract. The “gearing” or “leverage” enables investors to have a Forex position many times bigger than their actual account value, and with just a small amount of money. However, when prices fall, high leverage can cause investors huge losses relative to their first deposit. This is how an investor can attain huge loss through a small movement against his/her position.
The market is moving against you
It is never possible to forecast the movement of the exchange rates in the Forex market, due to the existence of fluctuations. Forex contracts, and future profits and losses are affected by the changes in the foreign exchange rate between the time the investor make the trade, and the time that he/she closes it.
Relying of the dealer’s dignity
In the retail off-exchange Forex market, there isn’t any main marketplace with many buyers and sellers. The execution price is decided by the Forex dealer, so investors must trust the dignity of the dealer for a fair price. Moreover, amounts deposited for Forex trading contracts are not assured and don’t have a priority during bankruptcies.
Trading system break down
Investors that use an electronic system for establishing trades may experience system failure. This might result in achieving huge losses of orders or order priority, because investors will not be able to insert, execute, modify, or cancel orders.
The Forex trading system algorithm is a set of procedures that indicate the way the system manages entries, and exists at losses and profits. The steps require to be coded into an information system to allow the automation of trading, and to implement the actual algorithm. The trading system algorithm utilizes price smoothing algorithms.
Traders have to change the data series of a price into signals of trading. However, price data is very noisy, and it is almost the same as trying to adjust a radio station over a lot of crackling noise. It is very difficult to differentiate between the essential and the random noise.
Noise is an element of price data that can never be traded; trading noise might result in minimizing your profits. It is important to set the noise and the signals apart. This will enable smoothing the price series, which will result in highlighting the fundamental direction.
This problem is demonstrated in signal processing, and there are some existing advanced techniques, however, traders usually use very crude approaches. The following section will demonstrate a set of the traditional approaches.
(The Breakout and the Moving Average)
There are two filters of crude noise, the moving average and the breakout including its variants. The breakout is a signal of entry or exit, it takes place when the existing price exceeds for instance a 20 day high, or decreases below a 20 day low. The attributes that can be pulled out are the number of periods and the balance that the price must be greater or lower than the high or low.
Filtering the noise through this approach is done through a volatility filter. The system tries to reduce the price volatility parameter to noise, and presumes that the price that is greater than a specific level presents an actual signal (not noise). The breakout can be demonstrated in an algorithm through the following equation:
If price + trigger amount > high of n periods then buy
If price – trigger amount < low of n periods then sell
The second approach is the moving average; it is the average of the last, for instance, 20 periods. The outcome will be a line that is smoother than the actual price series, but still falling behind about half the chosen period. The longer the number of periods, the smoother the line is. The existence of more lags to price action, and a short number of periods results in making the line presenting the noise less smooth, but still more reactive to conversions.
Noise is removed by the moving average approach through minimizing the effect of a specific noisy value by averaging out this specific value. This average might have been affected by the extreme values; this will probably result in having an unrealistic average value. In other words, this approach doesn’t work very well with noisy data, except if you selected a long moving average period, which induces lags. The algorithm for a moving average (n period, where n is an integer, e.g. 20) is demonstrated through the following equation:
Forex trading is a way of generating profits by investing, and trading different currencies. It is considered one of the major trading markets that exist worldwide. The Forex market involves high levels of trading volume and liquidity.
There are many Forex trading strategies and techniques that exist nowadays. All Investors are allowed to use any Forex trading technique including; Hedging, Scalping, and Position trading. It is recommended that investors select the technique that most suits their objective. Facts provide that the existence of consistency in the trading technique results in achieving the targeted goals, and enables maximizing profits whether the investor was trading on the long or the short term.
Forex Scalping is the most recent technique of trading; it involves generating profits after the occurrence of small moves in the Forex market. Moreover, it involves trading over short time frames and generating small profits more frequently. Scalping requires the opening and closing of positions within a short period of time, it can take place within few seconds, and it can extend to take place within few minutes. Scalpers don’t focus on the trend of the market, but they rather choose to trade during the stability periods of the market. In general, they prefer trading with small amounts, and aim to get hold of small movements within the market. Scalping provides a low risk environment because profits or losses from limited movements are comparatively low. Furthermore, Forex Scalping can be employed as a profitable strategy when many small trades take place during the day. Scalping is best done in alignment with a news release and supportive technical conditions.
Forex Hedging is a technique that minimizes risks by considering the different sides of a trade at the same time. If the technique was employed in the right manner, it will offer traders more control over the bottom lines, and more protection against losses and undesirable fluctuations of currencies. If Hedging is allowed by your trader, an easy way for hedging is to start a long and short positions on the exact pair. Expert traders may use two distinctive pairs to construct one hedgy, but it may be very complicated.
Forex Position Trading
Forex position trading technique is also a risk-free technique; it is intended to maximize the position size of the traders while still maintaining the risk level. This technique is most efficient with mini lots, and with this technique, traders are less exposed to the market, thus they don’t need to continuously evaluate and monitor the market. Moreover, through employing this technique, traders can generate profits with small losses, thus maximizing their trading confidence. For instance, you might perform a short trade on EUR/USD at 1.40. If the pair is trending lower, but then retraced up, and you performed another short as about 1.42, then your overall average position would be about 1.41. By the time the EUR/USD falls back to lower than 1.41, you will have endorsed an overall profit.
The foreign exchange market also called Forex or FX, is the hugest asset class that exists worldwide, it involves more than $2 trillion global trading volume everyday. It is a market of not only exchange, but also speculation on currency prices. The Forex market is more than 10 times the size of the bond market, and about 50 times the size of the equities market. Trading is taking place on the Forex market 24 hours a day, five days a week; this enables the market to have higher liquidity, and to be more volatile.
In general, investors focus on markets that provide the highest possibilities of returns. Thus they invest in the Forex market, as it offers the highest returns relative to other markets. Investing in the Forex market offers many other benefits including;
Low capital entry
A Forex broker has the ability to open a margin account with only $100, and with the leverage of up to 100:1, large capital amounts can be controlled by small ones.
Investors in the Forex market are provided by a large leverage by their brokers. As a result, huge amounts can be invested with a relatively limited amount of initial investment. The initial amount and leverage depends on the brokerage firm. It is recommended to start investing in a modest manner until having the adequate experience to invest with huge leverage.
Trading is taking place on the Forex market 24 hours a day, five days a week, this enables investors to enter or close a trade almost anytime.
One of the major appealing features of the Forex market is the easy liquidity. The size of the Forex market is huger than the size of the stock and the futures market combined together. Everyday, over 2 trillion dollars are being traded; this enhances the liquidity of the market. As a result, investors are motivated to make deals any time, maximizing their chances of generating profits.
The Forex market have changed from being limited to financial institutions to being a preferred investment alternative for retail investors. As a result, rich information about the Forex market became accessible by all potential investors and participants. The existence of information, updates, forecasts, charts and strategies enhances the process of decision making in the market.
As more retail investors are participating in the Forex market, more Forex trading software including many advanced features are made available for traders.
Trading in pairs of currency
Another benefit of trading in Forex is that the deals are made in pairs of currencies. Setting the trading option helps dealing with risky circumstances, such as having one of the pair currencies in a bad situation.
Potential investors can make use of the demo account before getting involved in Forex trading. The demo account will enable individuals to make mock trades without investing money. Through this account, individuals can test their skills, insufficiencies, and readiness for trading in the Forex market.
Forex (foreign exchange market) is a huge international money exchange market. It involves investors trading currencies for the purpose of generating profits. The foreign exchange market is larger than all existing bond markets; it is one of the most attractive moneymaking forms of investment.
People invest in the Forex market in an attempt to generate high profits; they get involved in buying or selling one currency pair against another. Individuals are required to be efficient in employing the best practices, so that they reduce losses and maximize their returns.