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Forex Risk Mitigation Tips

Forex trading has gained a reputation for being excessively risky due to a combination of the following reasons:

Forex trading has a high failure rate, especially from beginners who fail to do their homework and understand the risks associated with leverage commonly used in forex trading.

Forex brokers who do not provide forex education materials for beginner traders to deal with the risks of using leverage.

There is a large segment of the mainstream media talking about excessive forex risk. A typical scheme runs as follows: “Some naive beginners believe that the get-rich-quick offer that some forex brokers are offering is possible with little effort or basic forex trading knowledge.” There are many traders who have been shocked and have concluded that forex trading may not be suitable for most people and “successful traders who have been learning forex are the other side of the equation.”

If you have the right preparation and have strict risk management discipline and proper money management, you can keep your risk to acceptable levels, just like with any other investment. As with other activities, there are ways to simulate the Forex trading experience (Forex demo account) until you are ready for real trading. You can start Forex trading slowly under simple trading conditions (a small Forex trading account starting at $100) until you are ready for more difficult conditions (a larger Forex trading account starting at $5,000).

However, there is always risk when trading any type of securities, although you can try to mitigate it with some smart strategies. Here are some of these strategies:

Start small

Start Forex trading with a small amount of money that you can afford to lose. If you make winning trades early, remove that money from the table. Don’t let early success fuel overconfidence and push you to make bigger, riskier trades. Consider using a demo trading account before you start real Forex trading.

Practice on a demo account

Take common sense precautions

When starting real trades, use some protection tools. Use small lot sizes, which is the easiest way to control the markets. Don’t risk more than 1-3% of your capital (trading capital) in Forex trading. Use protective orders such as stop loss and spread your available funds across multiple trades rather than trading just one pair.

Learn how to manage your risk

Make a Forex Trading Plan

Make sure you have a well-thought-out and diversified personal finance and investment plan in place. Don’t let a single misstep in the world of Forex trading harm your financial health in the short and long term. You need to do your homework, especially if you are trading with leverage which increases risk as well as reward.

Free Forex Trading Courses

What drives the Forex Market?

The Forex market is made up of many currency pairs around the world, making it difficult to predict future exchange rates as there are many factors that can contribute to price movements. However, like most financial markets, Forex is primarily driven by the forces of supply and demand, and it is important to understand the influences that drive price fluctuations when trading Forex.

Let’s take a brief look at each of the fundamental factors that drive Forex prices. For a more in-depth understanding and Forex learning, visit CAPEX Academy.

1). Risk Tolerance in General

The most influential fundamental factor that determines the fate of a forex pair at a given time is the overall risk appetite, also known as market sentiment or, in plain English, whether the markets are feeling optimistic or pessimistic. If they are feeling optimistic, whether it is over a period of hours, weeks or more, risk assets tend to rise and safe haven assets tend to fall, and vice versa.

These major forex pairs are classified as one of two types: risk currencies or safe haven currencies. For now, just know this in general:

The Australian dollar, the New Zealand dollar, the Canadian dollar, the British pound and the euro are classified as risk currencies because they tend to rise in times of optimism and fall in value in times of pessimism like other risk assets such as stock indices or industrial commodities.

Depending on the challenges facing the markets, the Swiss Franc, the US Dollar and the Japanese Yen are classified as safe haven currencies which tend to fall in times of optimism and rise in times of pessimism like other safe assets that are in high demand when markets are fearful or panicky, such as investment bonds and mutual funds.

Below is a table showing the ranking of these currencies on a hierarchical basis from riskiest to safest.

Risk Currencies - Safe Haven Currencies

Source: Seeking Alpha

In other words, the Australian Dollar is the currency that tends to rise the most when markets are optimistic and is classified as a risk asset, and the Yen tends to fall the most. In times of fear and panic, when risk assets are sold, the opposite happens.

These classifications only indicate how forex pairs behave relative to other assets. However, safe haven currencies cannot be considered as a store of value. For example, the Japanese Yen generally acts as the safest currency as a safe store of value, however, there are few traders who would argue that the Canadian Dollar is a good store of value over the long term given the financial health of the Canadian economy. While the above general classification works over a period of weeks or months, it

 

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