tools available to the trader to limit this risk, such as stop loss orders, and novice traders need to familiarize themselves with these tools and to ensure that they make full use of them whenever they enter a trade.
3. Credit Risk. Because there are two parties (a seller and a buyer) involved in every transaction there is a possibility that one party will fail to honor his or her commitment once a deal is closed. This usually happens where a bank or financial institution declares insolvency.
You can reduce any credit risk considerably by trading only on regulated exchanges which require members to be monitored to ensure their credit worthiness.
4. Interest Rates. When trading any pair of currencies traders need to watch for discrepancies between the underlying interest rates in the two countries in question, as any discrepancy can result in a difference between the profit predicted and that which is actually received.
5. Country Risk. Occasionally a government will intervene in the foreign currency exchange markets to limit the flow of its countrys currency. It is unlikely that this will happen in the case of a major world currency but could occur in the case of minor and less frequently traded currencies.
These of course are just some of the risks involved in trading and novice traders will need to familiarize themselves with the others as they go along. However, a good understanding of the 5 risks detailed here is essential before you enter the trading arena.
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