Key Things You Should Know Before Stepping Into Currency Trading

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

With recent political tensions infusing volatility into the currency markets, many popular currency pairs have been experiencing exciting price runs.

Since Jan. 13, the dollar-to-pound (USD/GBP) pair, for example, has risen from a low of 0.72736 to a high of 0.76394, nearly a 6% increase in two months. During the same time period, the euro-to-dollar (EUR/USD) pair dropped from a high of 1.14816 to a low of 1.08059, a 6% move in the opposite direction.

With growth stocks like Airbnb Inc. ABNB and Upstart Holdings Inc. UPST still recovering from their dramatic drawdowns, the foreign exchange (forex) market looks more appealing than ever to many. 

As any wise trader will tell you, however, trading and risk go hand-in-hand, and entering new markets blindly can lead to failure. Forex markets have a long list of benefits, including greater accessibility, leveraging opportunities and tax advantages, but they also come with a wide range of risks. 

For FOREX.com, the #1 Forex broker in the U.S.*, it's a responsibility to ensure all traders fully understand the risks before trading these emerging markets. 

*Based on client assets per the 2021 monthly Retail Forex Obligation reports published by the CFTC.

Forex Trading: The Risks You Should Know About

The first thing traders should understand is that forex markets are extremely volatile. 

Volatility – the propensity for radical price shifts in short periods of time – is both a trader’s friend and foe; a trader needs volatility to take advantage of price movements, but an irresponsible attitude toward it can lead to a significant loss. Volatile movements are a particular risk concern in currency markets, where trades are often executed on margin. 

Another key risk element in trading Forex markets is the spread. The spread describes the difference between the bid and ask price for a currency pair. Generally, the less interest in the currency pair, the greater the spread risk. Major currency pairs – like EUR/USD, USD/JPY, GBP/USD and USD/CHF – are traded in high volumes, meaning their spreads are typically tight, but other “exotic” pairs may have significant spreads that make it difficult to manage risk. 

Diving deeper into the forex world, traders will find that leveraging and prediction difficulties also greatly increase the risk of trading currencies. Because of their intrinsic ties to international policies and national developments, it’s difficult to predict macro events beforehand. The difficulty with accurate prediction is compounded by leveraging practices, which allows traders to assume greater buying power by borrowing money from others (typically, the broker). 

Assuming traders have been diligent enough to complete a thorough research process on the risks mentioned, they would still need to consider at least one other major risk: security. Two popular forms of currency-based securities are forex and contracts for differences (CFDs), and each come with their own set of risks. 

Forex trading, for example, is about trading one currency against another and always involves trading in uniform lot size. Forex trading is far more driven by global events, while CFDs are more influenced by specific factors such as shifts in supply and demand. CFD trading also involves different kinds of contracts, which cover a diverse set of markets. They entail a different risk bracket than forex. 

Contracts for Difference (CFDs) are not available to US residents.

FOREX.com: Currency Trading In Every Form

The purpose of risk analysis is not to scare traders away from currency markets. A key step is understanding the risks – no matter how scary – associated with currency markets. 

FOREX.com says that it empowers traders by providing them with a wealth of information and a host of trading tools to expedite their journey toward success. 

Start your currency trading journey here.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

Forex trading involves significant risk of loss and is not suitable for all investors. 

Photo by Ibrahim Boran on Unsplash