Most kinds of speculative activity involve some kind of risk. This is true even for arguably risk-free strategies such as arbitrage where online trading can be interrupted by connection problems, and the resulting events can lead to sometimes serious losses. In forex where trading risks in forex market analysis are compounded by the use of leverage, this problem is even more serious and deserves a lot more attention.

As most traders know, leverage involves the use of borrowed funds for increasing the profit potential of a trade. There are many ways of achieving this, and direct buying or selling of an asset is not the only one. For example, a trader who wants to leverage his position in the EUR/USD pair may buy 1 lot of this pair, and he may also buy a buy a option on $10000 worth of Euros, multiplying his overall exposure. Another way of leveraging the sensitivity of your position to a carry pair, for instance, would be purchasing futures on the index of a stock market. Since carry trades and stock prices are so closely related, the resulting position would have greater exposure to price movements, and gains and losses would both be multiplied as a result.

While there are a large number of ways of leveraging, the outcome is always the same: your exposure increases, and stronger and stricter trading risk controls become a necessity. What must the retail trader do to ensure that his attitude to risk is prudent and sensible? If the trader is making use of high leverage, he must makes sure that his account is capitalized enough to endure fluctuations and shocks. It is not just the usual market volatility that we speak about, but also the problems that are specific to the broker, such as those born of faulty software, bugs, connection problems, misquotes, and many other possibilities that can arise in a digital trading environment. Another way to control trading risk while using high leverage is diversifying. But splitting your trades into weakly correlated pairs, you can try to minimize the trading risk that everything will go against you at the same time. The proper use of familiar methods like stop-loss and limit orders is also encouraged.

Even after applying all these cautionary mechanisms in order to reduce the likelihood of sudden spikes, many traders will discover that the fickle nature of forex is not very advantageous for strategies that depend on high leverage.  Ultimately, leverage must be adjusted to market conditions, and be lowered in a highly volatile environment, while it can be increased if market volatility is low. Traders must remain alert and sensible: there doesn’t exist a style, strategy, or account size that can eliminate the dangers associated with market volatility. Learning about trading risk management is the first step to a successful forex trading career, and it is also the most arduous, but the benefits gained may well be unlimited.