The financial world has a broad array of risks to which traders must be alert. The most fundamental risk is that of losing money. Some Brazilian traders lose so much money that it becomes impossible for them to continue trading. Even professional forex traders sometimes struggle to make a profit in any given day. The length of the contracts, their leverage, and other market factors all play their part in determining whether a trader makes money or loses money trading forex. This article takes you through some of the most common risks Brazilian forex traders face, and how to manage those risks successfully.
Liquidity and market uncertainty – When trading in commodities, like oil or gold, it is possible to buy low and sell high. However, this is not possible in the forex market, where you only make or lose when buying or selling. This means that you need to be very careful when investing in forex markets. A lot can go wrong if you are investing small amounts. One bad trade may result in a large loss. However, when trading in stocks or other equity-oriented assets, the risk is much higher. If a company goes bankrupt or is acquired, that could have a huge impact on your investment.
Leverage and risk of losing money – The leverage in forex trading refers to the amount of money you are borrowing to take part in the trade. With very little leverage, you can make very good profits with very little risk. While much more is possible with great deal of leverage, we will keep it at a moderate level here. A simple way to think about the leverage in forex trading is this, as explained by a forex broker in Brazil: If you borrowed $100,000 to take part in the trade, and that trade went against you, you would lose $100,000. On the other hand, if that trade went in your favor, you would make $100,000. This is known as the “reward” or “back-of-the-envelope” calculation, and it is one example of the “leverage premium” that forex traders have to pay.
Currency fluctuations – When you trade in a non-standard market like the forex market, you have little control over the movements of other market factors. Other market factors can cause the prices in your chosen asset classes to go up or down. It is possible, for example, to buy gold at $1200 an ounce and sell it at $1200 the next day. This is known as a price fluctuation. While most forex trading involves only one currency at a time, sometimes you will need to trade in more than one. For example, you may want to buy gold at $1200 and sell it the next day at $1200. This is known as a “swap” trade. The amount of a fluctuation has little to do with whether or not it is a risk. However, if a price fluctuation has a large impact on your trading, you may want to consider reducing your leverage. It is generally recommended to keep your leverage between 20:1 and 50:1 when trading in the forex market.
Interest rate fluctuations – One of the most common risks in forex trading is interest rate fluctuations. It is not uncommon for a forex broker in Brazil to offer interest rates that are variable, meaning that they are likely to change at some point in the future. If you are investing large amounts, or if you are a repetitive trader, you may want to consider getting into the forex market on a short-term basis. This is because the interest rate is likely to change, and you may be able to make better returns with less risk.
The most significant risk in forex trading is the risk of losing money. Maximizing profits requires a healthy amount of caution and a recognition of the risks involved. The only way to minimize these risks is through an in-depth knowledge of the market and a strong trading strategy. Forex trading is an investment that involves considerable risk and may produce high returns. However, it is also potentially very profitable.
