The past couple of months have certainly been a rollercoaster ride for the UK and more importantly the pound. The currency has fluctuated wildly more of the same is expected if there's so resolution on the way. So does this unique window present an opportunity to try forex trading or is this period too risky for first-time traders?
This article is sponsored by Compare Forex Traders
The Case Against Forex Trading Currently
What makes forex trading different is leverage. Leverage is similar to offering a trader a loan that's a multiple of their deposit and can be up to 500:1. As an example, a deposit of $100 could allow a trader to trade $50,000 on currency markets.
A high leverage of 500:1 would mean just a small 0.2% movement in the pound will mean a trader doubles their deposit or loses the entire deposit. Therefore the extreme fluctuations could lead to huge profits or losses that exceed their deposit, which could lead to a forex broker requesting additional funds to address your negative balance.
If losing more than your deposit has already led you to consider trading currency, the good news is there are safeguards. Below goes through three features that EasyMarkets offer to help manage your risk during this Brexit period.
1) Guaranteed Stop Loss Orders
Some forex brokers offer this feature which allows a trader to set the limit they are willing to lose on a single trade. This means that even when there is a sudden fluctuation of the pound in the wrong direction, you will automatically exit the market at the agreed amount. If the broker can’t achieve this price then they will wear the difference.
In simpler terms, when you have a guaranteed stop loss order, what you set for a maximum profit or loss is what you will get.
2) Guarantee Negative Protection
Trading currency is different from shares since you can lose more than your deposit. This is because leverage can lead to sudden losses exceeding your initial deposit amount. Extreme events like the Swiss currency collapse in 2014 led to many traders having to pay back large amounts to their broker due to large losses. (It should be noted that some traders also made large profits over this period.)
The good news is some brokers protect against losses exceeding their deposit - this is known as negative balance protection which exits a trader once losses meet the deposit. If the forex broker can’t exit the broker in time, they wear the losses (similar to guaranteed stop loss).
3) Deal Cancellation
This final risk management feature is unique to EasyMarkets, unlike the first two which are offered across several Australian forex brokers. Once activated it allows a trader to exit a trade within an hour and without making a loss. So, as an example, if the UK parliament vote in an unexpected way, leading to the currency moving in the wrong direction, a trader can exit their loss-making trade if it’s within the one-hour period.
So Is Brexit A Good Time To Currency Trade?
The short answer? Yes. Volatility is good when forex trading, with nobody knowing how Brexit developments will resolve itself. The key, however, is to manage your risk so you can avoid losses exceeding your limits and initial deposit - choosing a forex broker like EasyMarkets and activating risk management features is central to achieving this.
Just understand that leverage leads to risks - this needs to be be taken into account before trading. It's not suitable for everyone.