Forex Trading Risks
While Forex trading provides many opportunities, it also carries significant risks, as the retail market is almost entirely closed over weekends. The interbank market, where banks trade with each other and determine exchange rates, faces various regulatory oversight, depending on their location. Banks have to accept numerous risks, including sovereign, credit, and counterparty risk. Each bank deploys a risk management department to shield itself as much as possible. Forex products are not standardized, and different regulators approach Forex trading with varying degrees of rules, while a few do not regulate it at all. Therefore, trading from a competitive jurisdiction can offer traders an edge, with the EU the least competitive one. Supply and demand dictate currency pair prices, but retail traders of market-making brokers may face re-quotes, and stop-loss hunting, exposing them to risk imposed by untrustworthy brokers.
Managing the risks of Forex trading
Managing the risks of Forex trading will define the outcome of any trading strategy. Forex trading for dummies mostly covers other aspects, and misleading label leverage is why retail traders lose money. The lack of risk management leads to losses, and most traders apply a static number for their stop-loss orders in a dynamic market. While it offers protection and ensures trading losses do not exceed a set amount, it is far from an in-depth and effective risk management strategy. I urge all traders to learn about managing the risks before thinking about trading strategies and order placement.
Two order types to assist with managing the risks of Forex Trading:
Stop-loss order - It closes a trading position at a set level. A stop-loss order does not guarantee the price. Execution is dependent on market conditions and the liquidity of brokers, but most will trigger at or near the set level. Some brokers provide a guaranteed stop-loss order for a fee. It ensures that the entered price is honored. A trailing stop loss will adjust with price action. Professional traders and profitable retail traders use a stop-loss order to close trades at a profit.
Limit order - It executes an order at a future price or superior level. A buy limit order and a sell limit order will only trigger at the set price or below and above, respectively. It offers traders more control over order placement. While the price is guaranteed, the order filling is not, and again depends on market conditions and broker liquidity. Limit orders together with stop-loss orders can protect the downside of portfolios, but traders may also miss trading opportunities in fast-moving markets.
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