Traders place trades through brokers who, in turn, place corresponding trades on the interbank market. Currency values can change quickly and often, for many reasons. Sometimes it’s a reaction to external political and economic news, such as Great Britain’s proposed exit from the European Union. Other times, the market itself drives value changes. Often, both external and internal events drive currency value changes on the forex.
The fluctuations aren’t bad in themselves, but it’s a trader’s inability to accurately forecast those changes that create risk. Dollar is strong, companies in the United States may buy more European products, which have become correspondingly less expensive. To pay for these products, they exchange US dollars for euros. When large quantities of dollars are exchanged for euros over a short period this drives up demand for the euro.
Currencies are traded by individual retail investors, financial institutions, and corporations doing business internationally. Retail investors and banks trade to make profits, and corporations usually trade in the normal course of buying and selling goods and services across the globe. Currency trading is typically highly leveraged, so with a small amount of cash investment and a certain amount of margin, investors can control a very large amount of money. Both factors increase the risk of forex trading. The key to successful currency trading is to trade conservatively while employing some means of risk management.
Typically, traders who make only a few large, concentrated trades are more apt to lose money. Traders who distribute their trading funds over many different trades diversify their risk and have a better chance of trading profitably. Similarly, traders who leverage their trades aggressively are more likely to have large losses than those who don’t. The risks of forex trading are genuine, and according to a 2014 Bloomberg report, almost 70 percent of forex traders lost money in each of the preceding four quarters. Making money trading on the forex involves a good deal of risk, but some traders do make money. Diversify risk by making several small trades in different markets rather than a single trade. Until you understand how to use it prudently, avoid using the available leverage, which can exceed 50 to 1.