Forex Trading Library

Is Forex Trading High-Risk?

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The simple and probably most useful answer is “yes”.

But, like all things, when it comes to sophisticated financial instruments, there are caveats.

The thing is, Forex is quite broad. And in many cases, it is used as a way of mitigating risk. When people are asking about Forex, though, usually, they are thinking about online retail forex trading, and that is its own thing.

In its most basic form, Forex is simply buying and selling different currencies. The risk associated is when those currencies change value.

Generally, these are very small market moves compared to stocks, especially when we are talking about the major world currencies, such as the pound, dollar, euro, etc.

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So, Where’s the Risk?

The reason retail forex trading is generally considered a high-risk investment is that its primary appeal is the ability to invest with margin. And a lot of margin at that!

That’s when your broker loans you money to invest in the forex market based on a small security deposit. Forex allows margins that are orders of magnitude that traditional banks and stockbrokers use and offer.

The consequence is that small moves in the currency are magnified and have a major impact on your funds. This means you can make quite a bit of money. But, you can also lose a comparable amount of money as well.

That makes it a high risk/high reward investment vehicle.

You Don’t Have to be like Everyone Else

But, just because a lot of people are attracted to forex because of the margin, it doesn’t mean you have to invest in a very risky fashion.

You don’t have to take out the highest leverage. You don’t have to make the largest trades. Those are simply possibilities that are offered, but it’s up to you to cut your risk down to a level that suits you.

Many FX traders are tempted to take on unnecessary risk. And, often, that’s the primary reason they don’t become consistently profitable traders.

Even if you decide to take a less risky approach, there is always the possibility of being tempted to make “easy money”.

Risk Management is the Key

Which is why it’s useful and practical to think of forex as a high-risk investment. That way, you’re more aware of risks, and consider them in your trading decisions.

Many advanced, successful forex traders credit risk management as the primary reason that they can become professional traders.

The high-risk environment of Forex allows savvy FX traders to devise techniques and methods to reduce potential losses as a strategy to move the risk/reward ratio in their favor.

In the end, how much risk you want to take in Forex is up to you. The real danger is being tempted with thoughts of easy money to make trading decisions you shouldn’t.

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