5 Common Risks To Know About Before Trading In The Forex Market

Every beginner entering the forex market knows about the profit potential of currency trading and the ease with which you can start off your trading journey. But to make profits as a forex trader, one must be able to cope with the risks that are associated with currency trading. However, many new traders tend to underestimate the risk either due to ignorance or lack of proper knowledge. To gain something, you must be willing to lose something and this possible loss is what we refer to as risk in trading.

In this blog, you will learn about different types of risks that you will have to deal with as a forex trader and when you are aware of the risk factors, you will be able to manage it in a better way.

1. Transaction Risks

Transaction risk of forex trading includes various risks that directly impact the process and results of trading. Some of these risks can be related to the technological aspects but for the most part, the risk comes from the changes in exchange rates. Since the forex market runs 24 hours a day, the difference in time can increase the exchange rate risk as the conversion rate of a currency can change throughout the day, especially during different trading sessions.

Hence, when you enter a trade and keep it running for a longer duration, the transaction risk increases. The cost of keeping a trade position open for an extended period of time adds more to the transaction risk. The exchange rate fluctuations are what give us opportunities to make a profit but if the difference in the exchange rate is unfavourable, the same can lead to losses in the end. So, you need to consider the transaction risks while trading.

2. Leverage Risks

The opportunity to trade with high leverage makes the forex market an attractive place for many beginners who only have a small amount of capital to start with. By using leverage, you can open larger-sized trade positions with a smaller amount of deposit in your trading account. You just need to ensure that the account balance reaches the margin level stated by the broker and you can use a margin calculator to find the margin requirement based on your trade size and leverage ratio.

The purpose of leverage is to amplify the potential profits as your trade size gets bigger and you won’t have to trade with a huge amount of money to get the benefits of a larger-sized trade. But the potential losses will be equally big when you lose the leveraged trades. This is the leverage risk in forex trading and you need to minimise the risk by following a cautious approach and setting some limits for the maximum amount of leverage that you can use for a trade.

Another thing that can happen when you are not careful with leverage is a margin call situation. A margin call is a notification to deposit more money into your trading account as the account balance falls below the required margin level. There is no sufficient margin to keep the trades running and if you don’t add funds in time the trades will be automatically closed by your broker. So, you need to plan the trades well to avoid margin shortfall in the middle of a trade.

3. Country-Associated Risks

The country-associated risk in forex refers to the risk that is there if a country is affected by an economic or geo-political event which also impacts the value of their currency. This risk is higher for currencies from developing or emerging economies. Such currencies are paired with major currencies and they are known as exotic pairs. They are extremely volatile and the country-associated risk needs to be considered when you trade with an exotic pair of USD/ZAR.

The financial institutions of developing countries are not strong enough to stabilise the currency’s value. Hence, you will be exposed to country-associated risks while trading with an exotic pair or other currencies that are risky at the moment due to an adverse economic or political situation in the origin country. You can avoid this risk to a great extent by sticking with major currencies as they are supported by stable and well-developed economies.

4. Interest Rate Risks

The interest rate policy of a country directly influences the value of their currency and this is what we refer to as interest rate risk in forex trading. Because the currency pair prices will be influenced by the interest rate revisions that happen in economies. The interest rate differential between the currencies in a pair is a key aspect to consider when you are opening an overnight trade position as the swap fee will be applied to all trades that are held for more than a day. The swap rate is based on the interest rate differential of currencies.

The swap fee is the cost of keeping a trade position open and you will have to take it into account while planning a trade that is kept open for a longer duration. When the swap fee or rollover fee is deducted from your account balance, it can reduce your profits or add more to the losses. Planning your trade will be easier when you use tools like trading calculators that estimate the potential outcome of a trade with accuracy, and then, you can make informed decisions for managing the risk.

5. Dealer Risks

Dealer risk is associated with the broker that you choose for carrying out the trading process. The broker is in charge of connecting the retail traders to the decentralised market and executing the orders they place. The trading conditions you get on your account in terms of spreads, liquidity and leverage all depend on the broker or dealer. It is important that you get access to real time-market data and the speed of order execution can make or break the deal in the fast-paced forex market.

Because if your dealer or broker cannot provide enough liquidity, the risk of slippage will be higher. If there are frequent slippage and price-requotes happening with a broker, it will ruin your trading experience and it will be hard to get desired trading results. The level of transparency you get with a broker is equally important.

There are market maker brokers as well as STP brokers providing straight-through processing. With STP brokers, there is more transparency as there is no dealing desk intervention. ECN brokers also execute trades without dealing desk intervention and the spreads will be tighter as they connect with top-tier liquidity providers to find the best prices. So, you need to choose a trusted broker after some research.


To sum it up, the risks associated with forex trading is nothing to be fearful about as risks and rewards co-exist in every financial market. Many traders struggle to make consistent profits even after devising a sound trading plan and this can be fixed by focusing on risk management. You just need to understand how the risk can affect you as a trader and take some measures to manage the risk effectively.

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