In the investment world, you cannot be separated from risk. The applicable law is that the greater the potential profit, the greater the potential risk. Likewise in forex trading.
Forex is a type of investment with the highest risk. This has been mentioned in many sources. Forex profit potential is higher than deposits, stocks, or mutual funds; But the greater the risk of forex trading.
According to the results of several studies, including one by AMF France, 90% of traders end up losing. Or it could also be likened to only 1 person who succeeded, out of 10 people who plunged into forex trading.
Horrible isn’t it? Yes, this is a fact, like it or not, like it or not, we, you, must understand and interpret the statistical information above correctly.
Also read: Simple Guide How to Make Money From Forex Trading Up To US$1000
However, although the probability of winning in forex is low and not easy, it doesn’t mean it’s impossible.
There are many people who have been successful in forex, and we too can follow in their footsteps. One way is to understand the risks of forex trading before plunging into it.
Generally, the risk of forex trading comes from four things, namely price volatility in the forex market, the use of leverage, forex brokers, and our own psychological condition as traders.
Profits in forex trading can be obtained because the exchange rates between currencies (prices) fluctuate almost all the time. The magnitude of the distance up and down the price is called Volatility.
Currency pairs with low volatility will be difficult to trade. On the other hand, the greater the price volatility of a currency pair, the more profit a trader can get from it.
However, at the same time, the risk of forex trading on the currency is also getting bigger, because the possibility of loss also increases.
Variations in price volatility in the forex market can be seen in the table below. It appears that the price volatility in the daily, weekly, and monthly periods of each currency pair is different.
The greatest volatility was in XAU/USD (Gold vs US Dollar), while the lowest was in EUR/CHF (Euro vs Swiss Franc). From this data, it can be concluded:
- It will be difficult to profit from day trading on the EUR/CHF pair, as low volatility means the movement is almost stagnant.
- The highest potential profit as well as forex trading risk can be found in XAU/USD.
The very high volatility of XAU/USD makes it favored by many Indonesian traders.
However, traders who prefer lower risk forex trading will gravitate towards currency pairs with moderate volatility, such as GBP/USD, AUD/USD, and EUR/USD.
You are also free to choose the currency to be traded according to the amount of risk you are willing to bear.
Also read: 6 Reasons and Advantages of Forex Trading that You Must Know
Forex trading utilizes the Margin Trading system. Margin Trading is a system that allows trading to be carried out using only collateral (margin = guarantee).
The broker will offer “leverage” to increase the margin funds to a larger trading fund.
By using this system, traders have the potential to earn big profits even with small capital. How come? Let’s look at the following example.
For example, the price of the GBP/USD pair: 1.6000, capital of 100,000 Pounds, with a daily movement of 100-200 pips.
So an example of calculating profit when profit is (1.6200-1.6000) X 100,000 pounds = 2000 pounds. That is if trading without leverage.
How about using a margin system, or by using leverage?
With a margin system, you can trade only by providing a small part of the required capital.
For example, the broker receives a margin of 1% (1:100 leverage), then in the example above, you will be able to trade with only 1% x 100,000 pounds = 1000 pounds of capital, and with the same profit potential, up to 2000 pounds.
Along with this potential profit, there is also a potential loss due to forex with approximately the same amount. That is, with a capital of 100 Pounds, there can be a potential profit or loss of 200 Pounds per day.
So, your capital can disappear in just a matter of days, even hours, or minutes. In other words, the Leverage facility can help traders with small capital to profit, but also opens up the possibility of greater losses than capital.
Therefore, you need to be careful not to choose leverage that is too high, in order to keep the risk of forex trading low.
Also read: The 6 Type Forex Market Participants In The World
3. Forex Brokers
Another thing that increases the risk is: the ease with which a trader can start trading forex quickly and almost instantly.
Yes, currently brokers are very pampering new traders (beginners) with the ease of depositing funds, even plus bonuses, free trading capital, and so on.
In this case, traders need to pay attention that forex brokers are business companies that certainly want to make profits.
They will not hold a big promotion without expecting even bigger profits. So, when going to use broker bonuses and promotions, pay attention to the rules.
You also need to be careful if you get a bonus that is fantastic in size, but the terms and rules for claiming it are less clear.
Indeed, there are genuine bonuses in the context of promoting the broker’s name, but there are also misleading bonuses. If the amount is unreasonable, then you need to be careful so that it doesn’t turn around in the future.
4. Trader’s Personality
A trader can start trading in just days or even hours if he wants. In fact, to be successful as a trader, we need to learn forex trading first.
Going in too soon is tantamount to suicide; It is certain that the funds (capital) will be forfeited. If we only put in a small amount of funds, and then lose money, then it can be an effective learning material.
But what if it turns out to be a very large amount of funds? Of course it was very painful.
Forex is a high-risk investment model. Ignorance will make forex trading risk bigger. Conversely, the deeper the knowledge, the more psychologically trained we are to face the market, it will produce more promising profits.
Therefore, be patient and don’t be in a hurry to enter the world of forex trading. Don’t be tempted by promises of spectacular profits and income.
Indeed, the promise of big profits will be a very interesting forex trading motivation, but if it is not balanced by the right information and practice, it is like a “blind man who is eager to run into the abyss”.
Before investing years of savings in forex trading, see Tips to Avoid Losing In Forex, then practice on a forex demo account to first improve your skills.
If you do not understand the specific terms in forex on this page such as volatility, deposits, and brokers, you can visit Forex Dictionary. Take advantage of Forex Dictionary when you encounter new vocabulary for optimal understanding.