So you've decided to try your hand at trading the most liquid market in the world but don't really know where to start?
Thankfully we're here to talk you through everything you're going to want to wrap your head around first.
Not only will you need a forex trading account, you'll also need a solid understanding of the currency markets, trading experience, and risk management skills.
In this guide we're going to cover the following:
We'd recommend reading through each of the sections listed above before you start trading.
However, if you feel you're ready to go, you can follow this simple 5-step guide below to get started:
If you're ready to trade forex, here's Sign up to a forex broker.
Foreign exchange trading (also known as forex, FX or currency trading) refers to the buying and selling of currencies with the aim of profiting off price movements between 2 different currencies.
But where there's potential to make money, there's potential to lose it, and FX trading is no exception.
The currency markets are complex and constantly moving, involving many different players – both institutional and individual.
In Australia, true forex trading is typically only available to wholesale or institutional investors.
Instead, retail traders normally get exposure to the FX markets via CFDs (contracts for difference), which carry their own unique risks.
According to multiple reviews conducted by the Australian Securities & Investments Commission (ASIC), most retail clients lose money trading CFDs.3
Over the last decade or so, forex has become increasingly attractive to retail investors.
In the past, only large corporate institutions and banking houses could participate in the forex market, but with more brokers coming to the market, individual investors are also trying their hand at investing.
One of the reasons it has become more appealing than other investments such as the stock market is the opportunity to gain a higher return.
While currencies only move a few percentage points in a given day, since you are trading on the margins with leverage, there's an opportunity for outsized returns.
It needs to be highlighted that this opportunity comes with more risk. If your strategy backfires, you will also experience extensive losses.
There are a few key reasons traders are attracted to the FX markets:
Forex trades always involve 2 currencies, which are known as currency pairs. Some examples of currency pairs are set out below:
The first currency in the currency pair is the base currency. The second currency is the quote currency and indicates how much of that currency is required to buy 1 unit of the base currency. In a forex transaction, the investor is understood to be exchanging one currency for another.
Rather than physically exchanging the two, traders lodge a "buy" or "sell" order with a broker. Forex brokers are basically intermediaries who facilitate trade by accepting either buy or sell orders on a range of currency pairs.
If the trader lodges a "buy" order, they’re understood to be buying the base currency and simultaneously selling an equivalent amount of the quote currency. If they’re lodging a "sell" order, they’re understood to be selling the base currency and buying an equivalent amount of the quote currency.
Once the exchange rate moves, the trader ends the trade (or "closes out their position") by entering into an opposite transaction to the one they initially lodged. So if they initially lodged a "buy" order for the currency pair, they’ll now lodge a "sell" order, which reconciles the arrangement with the broker and ends the trade.
You can profit based on the differences in values compared with the currencies.
If you have a buy order, you make your money on the difference in exchange value. You need the currency you bought to go up against its pair. If you have a sell order (short-sell), you're looking for the price of the base currency to fall.
Because the exchange rate has fallen, you can now buy it for less of the quote currency than you initially used to buy the base currency. Once again, you pocket the difference. If you have sold, you're looking for the price of the base currency to fall.
Because the exchange rate has fallen, you can now buy it for less of the quote currency than you initially bought. Once again, you pocket the difference.
In order to maximise profits in forex, investors will often trade using leverage.
This is because the movements in currency values tend to be quite small. Usually, a large initial investment is required to realise any gains from forex investments.
So in order to increase returns, traders often use leverage, also known as buying on margin. This involves opening a margin account where you contribute a fraction of the total amount of the trade and the broker contributes the rest.
Margin trading means that significant profits can be realised from relatively low up-front investments. Equally, leveraged agreements between investor and broker mean any losses are magnified too.
You're feeling good about the odds, so you decide you want to use leverage to magnify your potential earnings and get another $2,500 from your broker. Now you can invest $5,000 in total.
The forex market is open 24 hours a day, 5 days a week due to the international time zones. If you are based in Australia, you can trade from Monday 8am through to Saturday 8am (AEST).
When it comes to trading, the market is broken up into 3 main locations:
Forex trading is actually incredibly risky and investors should understand that even small movements in currency can see them lose a lot of money. Not only do you have the potential of losing money, but even the most experienced traders find it difficult to predict market movements.
Some of the main risks include the following:
While you can't completely offset the risks you will face as a trader, you can mitigate them:
"(You minimise losses) via a stop loss order placed in the market... Many traders refrain from using a stop loss due to a reluctance to take a small loss, but losing trades is a part of trading, as are winning trades."
After deciding to trade in the forex market, you need to open a margin account with an initial deposit.
The size of the initial deposit depends on the amount of leverage that’s been agreed upon with the broker, often expressed as a ratio. For example, the leverage ratio may be 2:1, 10:1 or up to 30:1 (the maximum leverage allowed in Australia).
The leverage ratio indicates the percentage you must have available as cash in the account. For an account with a 30:1 leverage ratio, you need to have a cash deposit of 3.33% of the total invested amount. Most trades are done on 100,000 units of currency, so if you want to trade $100,000, you would need to have a $3,333 deposit.
(Please note: this is a simplified example of a forex trade and doesn't take into account things like spreads, fees and other costs.)
Michael has AUD$1,500 to invest in the forex market. He decides to trade the currency pair EUR/AUD, which is currently trading at 1.25 (hypothetically). This means that 1 euro buys 1.25 Australian dollars. Michael does some research and believes the euro will rise even more, relative to the Australian dollar.
He opens a margin account with a forex broker offering a 30:1 leverage ratio. This means Michael can borrow up to 30 times the amount of his initial deposit of AUD$1,500. This also increases his profit potential up to 30 times. At the exchange rate of 1.25, Michael exchanges all of his AUD$45,000 and purchases EUR€36,000.
Michael is correct in his assumption. The euro strengthens against the Australian dollar. It's now trading at 1.26. He exchanges his EUR€36,000 back into AUD, except now it's worth AUD$45,360.
As a result, Michael now has AUD$1,860 in his trading account after returning the loan ($43,500) to the broker. Taking into account his initial deposit of $1,500, this is a profit of $360.
As with other forms of trading, there are various strategies available to forex investors when they trade. Short-term strategies involve buying and selling currencies over shorter time frames. A few different approaches are common within this strategy.
With a long-term forex trading strategy, investors are banking on a gradual upward trend in the value of one currency against another. They hold their currency pair over a long time and ignore any intra-day or intra-week volatility. This has the advantage of necessitating fewer transactions. A level of patience is required to enable the trader to weather daily fluctuations in the value of their currency holdings.
This is a list of ASIC-registered forex brokers in Australia:
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
The forex market is actually incredibly important to everyday life.
It is the backbone of international trade and global investing. By determining the day-to-day value of each currency, it allows businesses to trade between countries through imports and exports.
One way you might've interacted with the forex market is through travelling.
If you were in Europe, for example, and were looking to trade Australian dollars for euros at a kiosk or bank, the number of euros you could buy would be determined by the forex rate. It is the same principle when you shop online with an overseas vendor or when businesses interact with each other.
When it comes to investing, traders can use the forex market. While it is incredibly risky, investors who want international diversification benefits can trade currencies.
All forex trades involve simultaneously buying a currency and selling another. These are known as currency pairs. Think of each currency pair as a different individual product that is bought and sold. The first currency listed is known as the base currency, while the second is the quote currency.
Example: AUD/USD = 0.73
When you buy a currency pair, you are buying the base currency and implicitly selling the quote currency. The opposite applies when selling a currency pair, where you are selling the base currency and implicitly buying the quote currency.
Example: AUD/USD = 0.73
The bid is the buying price. It refers to how much of the quote currency you need to buy 1 of the base currency. The ask is the selling price and it refers to how much of the base currency you will need to sell to get 1 of the quote currency.
Example: AUD/USD = 0.73
There are as many currency pairs as there are currencies. Just because you’re in Australia doesn’t mean you have to trade Australian currencies. For example, you might buy the currency pair of euros and Japanese yen (EUR/JPY = 129.49). But remember, the key to actually making money with forex trading is to have an understanding of how currency values are likely to change.
If you aren’t following shifts in both the euro and the Japanese yen, then that particular trade may not be a good idea.
| Response | |
|---|---|
| Majors | 60.61% |
| Minors | 36.36% |
| Exotics | 3.03% |
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