When it comes to forex trading, Malaysia has a fairly large community of traders with varying degrees of experience who advocate, teach and share knowledge on the widely-renowned topic.

That being said, currency trading comes with its own share of risks.

In fact, those who haven’t equipped themselves with the knowledge and know-how are prone to compromising their finances quite severely.

With that in mind, here are a few known risks that should be taken note of.

Legal risks

Malaysia has its own set of rules, conditions, and laws surrounding the activities of trading, particularly forex. Hence, it’s important to learn about the prominent and severe offenses before you continue.

As legislation is hazy, you run the risk of getting into trouble with the government if you trade with a brokerage that is not on the list of licensed institutions, which in turn leads to scrutiny over all your future actions.

However, most people who trade from Malaysia with their own money and an international broker will rarely. You can consider this a slightly lower level risk on the spectrum, but it’s still worth mentioning.

Exchange rate risks

The danger posed by changes in the value of a currency is known as exchange rate risk, a component dictated by the volatile fluctuations in the global supply and demand balance.

This risk is based on the market’s judgment on how currencies perform based on all potential variables that occur at any one time, anywhere in the world. What’s more, there are no daily price caps in place compared to regulated futures markets.

This is where a position limit comes into play, a common trading practice that refers to the maximum quantity of any currency that a trader can hold at any given moment. In contrast, a loss limit is a tool used by traders to prevent unsustainable losses by establishing stop-loss thresholds.

When attempting to control exchange rate risk, traders employ the concept of weighing their anticipated gains against their potential losses as a guideline. The premise is that most traders will lose twice as much as they profit. Thus, keeping your risk-reward ratio to 1:3 is a good rule of thumb while trading.

Interest rate risks

Basic macroeconomics says that interest rates have an impact on country exchange rates.

If a country’s interest rates rise, its currency will increase because of an influx of investments in its assets, presumably because a stronger currency offers higher returns. If interest rates fall, the currency will weaken as investors pull their money out of the market.

The difference in currency values can cause forex prices to shift rapidly because of the nature of the interest rate and its indirect effect on exchange rates.

Country risks

When considering investment possibilities, one must consider the structure and stability of the issuing country.

Exchange rates in many poor and third-world countries are pegged to a global leader, such as the US dollar. To maintain stability, central banks must retain appropriate reserves in this situation.

A currency crisis can emerge as a result of periodic balance of payment shortfalls, resulting in currency depreciation. This might have a big impact on currency trading and prices.

This is why some traders keep close tabs on the political climate of countries that are associated with targeted currencies, and some even capitalise on the political or socio-economic turmoil linked to currency fluctuations.

Leverage risks

In foreign exchange, low margin deposits or trading collateral are usually required as leverage. As a result, even a minor price change in a contract can result in quick and significant losses.

For example, if 10% of the contract’s price was deposited as margin at the time of purchase, a 10% reduction in the contract’s price would result in a total loss of the margin deposit. A drop of more than 10% would result in the entire margin deposit being lost.

Some traders may choose to use up to 100% of their account assets as margin or collateral. Traders should be mindful that using leverage aggressively can raise losses during periods of poor performance.

Scam risks

Last but not least, many countries including Malaysia, are often plagued by malicious behaviour when it comes to the trading sectors.

As an endeavour that offers the prospect of exponential monetary rewards, scammers usually try to lure in victims via methods of emotional manipulation. Get-rich-quick schemes are rampant, so be cautious if you ever feel like joining a forex trading group or pay to follow forex trading guidance.

Nonetheless, investing will always have risks involved, so take into account all the probable issues and be sure to avoid as much of them as possible.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.