Forex is never is Risk Free game and there is always a possibility that the trades can go against you. To avoid this, the FOREX trader can learn how to trade profitably and while minimizing losses. Always check whether your FOREX brokers are associated with large financial institutions like banks or insurance companies and with proper government agencies or not. In the United States brokers should be registered with the Commodities Futures Trading Commission (CFTC) or a member of the National Futures Association (NFA). You can also check with your local Consumer Protection Bureau and the Better Business Bureau. There are still risks to FOREX trading as the transactions are subject to unexpected rate changes, volatile markets and political events.
Exchange Rate Risk means refers to the fluctuations in currency prices over a trading period. Prices can fall rapidly resulting in substantial losses unless stop loss orders are used when trading FOREX. Stop loss orders specify that the open position should be closed if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate FOREX trading limit orders specify an open position should be closed at a specified profit target.
Interest Rate Risk can result from discrepancies between the interest rates in the two countries represented by the currency pair in a FOREX quote. This discrepancy can result in variations from the expected profit or loss of a particular FOREX transaction.
Credit Risk is the possibility that one party in a FOREX transaction may not honor their debt when the deal is closed. This may happen when a bank or financial institution declares insolvency. Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness.
Country Risk is associated with governments that may become involved in foreign exchange markets by limiting the flow of currency. There is more country risk associated with 'exotic' currencies than with major currencies that allow the free trading of their currency.
Limiting Risk FOREX trading can be risky, but there are ways to limit risk and financial exposure. Every FOREX trader should have a trading strategy knowing WHEN TO ENTER AND WHEN TO EXIT the market and what kind of movements to expect. This requires education which is the key to limiting FOREX risk.
At all times follow the basic rule:
• Do not place money in the FOREX that you cannot afford to lose.
• It is necessary to know at least the basics about technical analysis and how to read financial charts.
• It is necessary to study chart movements and indicators and understand how charts are interpreted.
Even the most knowledgeable traders, however, can't predict with absolute certainty how the market will behave. Stop-loss orders are the most common ways of minimizing risk when placing an entry order. A stop-loss order contains instructions to exit your position if the currency price reaches a certain point. If you take a long position (expecting the price to rise) you would place a stop loss order below current market price. If you take a short position (expecting the price to fall) you would place a stop loss order above current market price.