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- Last Posted: 2017-06-28 08:35:07
Currency Trading Perils to Take into Account2017-05-03 02:49:21
Being one of the largest markets worldwide, it makes sense to understand the threats engulfing the foreign exchange market. Traders also need to recognize that the ultimate goal of currency trading is to bolster its profitability by selling at a high price and purchasing at a low price. Unlike other kinds of traders, those who transact in the forex market can choose from several currencies. Forex assets are considered bankable investments, given its high trading volume. But such investments are highly perilous and speculative because these are valuable.
Traders encounter various kinds of risks when trading the currency. One of those is the country risk. Most rates of exchange are tied up to a major currency. Having said that, policymakers need to maintain a sufficient amount of reserves to keep a fixed rate. A currency crisis can surface if payment deficits often balance, compelling a monetary policy to depreciate the currency. Should that happen, expect massive changes in currency trading and current rates.
For instance, if a trader perceives a slump in the currency’s worth, he can start pulling out his assets or continue trading. They will incur losses or see their investments illiquid if they choose the latter. Currency-related adversities aggravate credit and liquidity dangers, plus it lowers the appeal of a particular currency.
Then there’s the threat brought by the counterparty who is responsible for offering the investment to the trader. The peril from this is the likely default from the broker or dealer in a business dealing. For currency trades, forward and spot contracts are not backed by a clearinghouse or a bourse. This mediator may fail or decline to follow provisions in contracts in times of erratic market conditions.
We also have the danger from interest rates that can definitely shape movements. For example, if a central bank moves to raise rates, the currency will escalate (in terms of value). Remember, high rates translate to high returns. But if a monetary authority decides to slash rates, the currency will devitalize.
And transaction-related dangers. This is inevitable due to time differences between the commencement of a contract and its settlement. We all know that the market facilitates order 24 hours a day and five days a week. The greater the time difference, the greater the risk.