Foreign exchange rates can change rapidly in response to any real-time economic and political events. This offers great opportunities for traders to make profits in the forex markets. However, volatility can be a double-edged sword, and losses can accumulate just as quickly. Volatility in the forex markets can bring ample opportunity to speculate and profit from forex price movements. However, there is always the possibility that your trades could go against you and this could net you a loss. Losses are common for most forex traders, even for the most experienced, and the key to becoming a successful forex trader is understanding and managing your risk.
Foreign exchange rate risk is the risk involved based on the effect of the continuous and usually volatile shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. This risk can be quite substantial and is based on the market's perception of which way the currencies will move based on all possible factors that happen (or could happen) at any given time, anywhere in the world. Additionally, because the off-exchange trading of forex is largely unregulated, no daily price limits are imposed as existing for regulated futures exchanges.
Investing in the forex market with any chance of success requires a good understanding of the processes and techniques involved. The investor will also need a good grasp of various factors affecting the markets and how he must react in order to turn any circumstances to his advantage. The greatest advantages of the forex markets, its size, liquidity, adaptability, and opportunities can also become the pitfalls if an investor begins trading without understanding the risks.
In a forex trade, the price fluctuation is not the only basis for profit. It is the leverage which causes gains to multiply. The actual price fluctuation in the value of a currency is very small. In order to make the biggest possible gains, huge leverage is necessary. However, leverage works both ways. With a high leverage, huge losses are also just as possible as huge gains. When you increase the potential for gains, you automatically increase your risk too. A small fluctuation in the price of currency on the higher side lets the investor multiply his investment.
The forex markets allow traders to leverage a considerable amount of money which can generate tremendous profits or incur large losses. The better you understand these risks, and how they can be monitored and contained, the more prepared you can be as a forex trader. Becoming an informed trader with risk management in mind is not impossible but does take a good deal of discipline. You should have a structured well thought out plan which includes the various components of risk and how you intend to address each.