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Main risks of Forex trading in Romania?

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Main risks of Forex trading in Romania?

Forex trading Romania is not a get-rich-quick scheme. It involves risk, and you can lose money. This article discusses the principal risks of Forex trading in Romania.

What is Forex trading?

FX trading is when you buy/sell currencies against another currency. For example, if you want to trade with US dollars (USD), you need to buy USD for EUR. Meaning that the amount of money you invested into buying USD will be how much money you get in return. 

USD is the currency’s name, while EUR is the other currency that you are trading with.

Forex trading can be done via manual, semi-automatic or fully automatic trade. Many traders usually use all three methods throughout their day to keep up with market changes and always have their investments working for them.

How is it done?

It will depend on what Forex broker one uses. But in general, when someone invests in forex, they are buying/selling currency pairs, not individual currencies themselves. For example, if you wanted to invest $100 into your forex account, you would want to buy 0.453001 NZD/USD because that means you’re investing $100 into NZD, which equals $138.41 in your account.

People who do not know how to protect their investments often think that Forex Trading is like taking part in a gambling game, where they make quick and simple calculations and quickly earn lots of money. 

Even if someone tries to explain to them that one should have deep knowledge about financial markets before starting trading with foreign exchange, they don’t understand why they should acquire this needed knowledge instead of just predicting the fluctuation rates for essential currency pairs, such as EUR/USD or USD/RON.

There are many types of risk in Forex trading, but it is essential to know them before starting because only awareness can help traders prevent or minimize them.

Here are risks you should consider before starting your trading activity:

Market risk

This type of risk appears due to price movements in currency pairs not following regular patterns. It is responsible for 80% of all market movement. Daily changes vary between 0.5% for major currencies such as EUR/USD or USD/JPY up to 7% for exotic currencies, such as AUD/PLN. Market risk is the most dangerous risk for traders because it cannot be controlled or predicted.

Liquidity risk

This type of risk appears when market participants cannot close any trade at the current price level, which makes market gaps possible. Lack of liquidity can create problematic situations in fast-moving markets due to slippage.

Leverage risk

Leverage is a double-edged sword. Higher position volumes can help traders increase their profitability, but they also amplify losses if volatility increases and prices move against your positions. The idea behind leverage is simple: you open a position worth 100 000 USD on EUR/USD pairs with only 10 000 USD (10:1 leverage). 

If prices go as expected and you make 3 000 USD, you double your money. But if prices move against you, you lose the whole 100 000 USD, and only 10 000 USD (or even less) is deposited in your trading account.

Default risk

This type of risk appears when your broker or dealer fails to fulfil its contractual obligations. It appears due to bankruptcy, fraudulent activities or inappropriate internal policies. For example, some brokers do not meet required standards for protection for traders’ funds as they keep such sums on the company’s accounts. 

In order to protect yourself from this kind of risk, it is necessary to choose a reputable and stable broker who has earned a good name over the years and where clients’ complaints are rare events.

Another essential aspect for any Forex trader is choosing an appropriate moment to open a position. After thorough technical analysis, this moment should be chosen, determining support and resistance levels. Traders must learn how to control their emotions, especially during intense price movements in either direction. An excellent way to do this is by studying Price Action strategies.

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