Forex trading is mostly dependent on changes in political and economical ideologies, which affects currency prices. The ideal forex investor must keep in touch with changes in political and economical views, inflation rate, GDP, growth rate, unemployment forecast using different news sources, so as to combine his plan of investing in forex trade. Some of primary factors that affect forex trading are:
- Market Philosophy: Perhaps this is the most unpredictable factor in forex trading which affects forex market to a great extent. Market philosophy influences the market in various ways such as by the rumors, long-term trade, flights to quality. One must beware of these factors while doing forex trading business.
- Economic factors: These are most important factors in forex trading as they directly affect the price of currency. Economic factors such as GDP, inflation levels and trends, government budget policies and balance of trade levels and trends.
- Political factors: Internal, national or international change in politics will affect the forex trading, because when government changes they will decide their policies according their views, which affects economical market of country.
Understanding the risk in forex trading:
Forex trading on margin can be very risky job and may not suit all investors. You must be able to understand and manage the risk to be a successful forex investor. There is also a possibility of losing some or all of your initial investment. You may take help of financial advisor to understand the risk and to manage the risk. The risks involved in forex trading are:
- Exchange rate risk: This refers to fluctuations in currency prices over the period of time. Prices can fall rapidly resulting in substantial losses until stop loss orders are used while trading stop loss order specify that open position should be closed when price of currency goes below the predetermined level.
- Interest rate risk: It may be result of discrepancies between the interest rates in two countries represented by currency pair in forex trading. This risk can result in variations in from the expected profit or loss of particular forex transaction.
- Credit risk: Credit risk is the possibility that one party in forex transaction may not honor their debt when deal is closed. The possible reason behind this may be that when bank or financial institution declares insolvency.
- Country risk: The government driving the may involved in foreign exchange market by limiting the flow of currency.
- Lack of information: A decision taken on basis of incomplete knowledge of country’s economic situation can lead to disastrous results in forex trading. Change in economy of one country may or may not affect economic condition of other country you must beware of this factor.
- Absence of regulation: Absence of regulation makes it difficult for forex investor to get arbitration when disputes arise. In this case there is no intermediary to help on disputes.
- High maintenance: The forex investor requires high maintenance. The investor must keep the track of change in currency price, trends in market and changes in market all the time to take necessary action to avoid the losses.
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