Forex Risk

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 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.