Just like any other investment vehicle, forex trading has its own risks and benefits. Mostly, you will read about the advantages of currency trading but you will rarely see its risks being mentioned. But the truth of matter is that approximately 90 percent of the foreign currency traders lose. One of the reasons why most people lose in the forex market is because they do not understand market trends and leverage well. Most of them see these as quite easy to deal with, but in real sense they are not.
Even though currency markets trend well, reliable trends are only shown in the longer time frames. Since a lot of traders want to make profits faster, they usually opt for short term day trending methods. But the problem is that moves within a day are random and they get stopped out continuously. Due to this, they never generate good profits. There are some long term traders who do not benefit from the long term trends because they do not know the proper way to deal with volatility and also to stop placement. As a result, they continually get stopped early before taking enough risk.
Most of the forex traders who are mostly concerned about reducing risks usually create a scenario that makes it hard for them to win. Leverage and volatility on other hand makes risk management to be extremely hard even for the most seasoned forex traders. To make good use of leverage, it is imperative that you study volatility and ensure that your stops are not too close. Your stops should not also be railed too quickly if you are looking forward to making large profits from big moves. When it comes to picking the market direction, most traders are very good at it, but the problem is that they keep being stopped.
Another risk that forex traders usually face is interest rate risk. This refers to the profit as well as losses that are generated as a result of the fluctuations in the forward spreads along with maturity gaps and forward amount mismatches in the foreign exchange book. The interest risk is usually caused by currency swaps. In order to minimize it, you will need to set the limit on the total of mismatches in your trade. You can do this by separating mismatches depending on their maturity dates into up to six months as well as the past six months.
If you are new forex trader, it is will advantageous if you avoid day or intra trading. You will also need to trade longer term but with a clear understanding of volatility, how to place stops properly and how to manage risks. By doing this, you will be increasing your chances of staying in long term trends. Successful traders usually understand the risks that the forex market has, and therefore they make sure that their trades are planned carefully in order to minimize the risks on their trading capital.
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Article Source: http://EzineArticles.com/?expert=Sylvester_Madxen
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