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There are always risks to FOREX trading,
even if your broker is quite reputable. All investments and
transactions meet the whole set of risks because of sudden rate
changes, changing market conditions and different political
events.
Many factors are the reason for these forex
risks. Just a few examples are: the main company's goals;
the scheme how these goals are reached; the successful company's
administration that guarantees its long functioning and at last
ability to oppose any force-majeure with company's own
resources.
Other constituents such as - the company's "age", the
building in the center of the town, spacious impressive office and
the polite staff - are not so important for success. Forex market
started functioning quite lately, approximately 20 years ago and
since then stands independently from other markets, first of all
because it is out of the exchange. Banks made up its primary
participants. As communication facilities and automation were
developing banks started trading "directly" without any
intermediaries such as stock exchanges. Many "classical" financiers
criticize and disregard Forex as there's not a single chance of
limiting and regulating it legislatively inside one state - from the
very start this market became a global phenomenon. However many
European and North American banks withdraw their main income in
particular from speculative operations on Forex market whereas the
number of the staff working in other market sectors is permanently
decreasing.
Forex market's broker doesn't need any licenses and
certificates for his activity as he is considered to be just a legal
person. That's why Forex market on the whole also doesn't run into
any "legislative limits" inside countries, and in many states is
equated to the games' organization.
So it's important to mention that there are no
regulations for Forex market, even despite of great number of
complicated problems and risks - such as the risk connected with
market prices' changes. Confidence and conscientiousness of carrying
out the operations, a lucidity and marketing of Forex brokers are
only some of the problems, managed of Forex risks. However, first of
all, it's important to know, that broker companies can't operate in
a single stock exchange in compliance with all problems and risks,
in contrast to quite adaptable exchange markets.
It's absolutely necessary for any FOREX trader to know at
least the main rules of technical analysis and reading financial
charts, to have experience of studying chart changes and indicators
and interpreting of these very charts. This is a certain way of
decreasing risk and financial exposure.
However each FOREX transaction should be
transmitted using all existing tools specially designed to reduce
loss as even the most professional traders can't exactly predict
market's future behavior. Many ways to minimize risks when placing
an entry order were elaborated. Among them are different types of
stop-loss orders. A stop-loss order is a special code of rules
explaining how one can leave his position if the currency price
amounts to a certain point. A stop loss order is placed below
current market price if a person takes the so-called long position
and expects the price to go up. On the contrary, stop-loss order is
placed above current market price if a person takes the so-called
short position and expects the price to go down.
As an example, if you take a short position on USD/CDN it
means you expect the US dollar to fall against the Canadian dollar.
The quote is USD/CDN 1.2138/43 - you can sell US$1 for 1.2138 CDN
dollars or sell 1.2143 CDN dollars for US$1.
You place an order in the following way:
Sell USD: 1
standard lot USD/CDN @ 1.2138 = $121,380 CDN
Pip Value: 1 pip =
$10
Stop-Loss: 1.2148
Margin: $1,000 (1%)
You are selling US$100,000 and buying CDN$121,380. Your
stop loss order will be executed if the dollar goes above 1.2148, in
which case you will lose $100.
However, USD/CDN falls to 1.2118/23. You can now sell $1
US for 1.2118 CDN or sell 1.2123 CDN for $1 US.
Still no existing institution is able to control this
market for long on account of the huge volume of FOREX. Whatever you
do in the end market forces will still be stronger, making FOREX one
of the most open and fair investment opportunities available.
Usually one comes across prices of foreign exchange by
FOREX quotes in pairs of currencies where the first currency is the
'base' and the second is the 'quote' currency, for instance: USD/EUR
= 0.8419. Here we find out that 1 US dollar costs 0.8419 Euros. Why?
The foregoing currency pair "transfers" US dollars (USD) into
European Euros (EUR). The base currency always stands in the first
place and the second, quote, currency shows the price for one unit
of the base currency.
And on the contrary, the pair EUR/USD = 1.1882 clearly
indicates that 1 Euro costs 1.1882 US dollars today.
With the help of these quotes it's quite easy to follow
the changes in the financial market. If the base currency is
becoming stronger, the price of the quote currency rises and this
fact indicates that one unit of the base currency will buy more of
the quote currency. However, if the base currency loses scores, the
quote currency immediately goes down.
Usually one counts FOREX quotes as "demand and supply" -
in the so-called "bid" and "ask" prices. The amount of money
demanded for the base currency - while selling the quote currency -
is called "bid" and the price expected for the base currency - while
buying the quote currency - is "ask" price.
How to define in the cross-currency charts which currency
- the base or the quote - is on the top and which on the side? If
that's the case, the broker should know at least one pair of
currencies and which one of the pair values more.
Stop and limit orders will definitely help yon to
minimize your Forex risks
source:http://www.forexrealm.com/forex-articles/forex-risks.html |