Forex trading might seem scary, but think of it as a much faster version of going to the money changer. Check out this introduction to the most liquid market in the world.
Forex trading guide for beginners
Forex trading explained
Foreign currency exchange, better known as Forex, is probably not as complicated as it is made out to be. Akin to how you would wait for the best exchange rates at a money changer before swapping your SGD to something else, Forex trading involves trading currencies at the optimal price to turn a profit.
What is Forex trading and how does it work?
Forex trading requires you to concurrently buy one currency and sell another via a broker. In order to do that, currencies are paired. These are called exchange rate pairs and an example would be the EUR/USD. In Forex trading, what you’re doing is hedging against the strength of an entire nation’s economy instead of a single company a la the stock market.
What is it?
Forex is short for foreign exchange and it is also known as FX and currency. Forex trading is buying and selling of currencies to make a profit by taking advantage of price movements between different currencies.
How does forex trading work?
People usually trade forex in currency pairs such USD/EUR. Take note that the base currency is the first currency symbol in the pair while the second is the quote currency. For USD/SGD, the base currency is USD while quote currency is SGD. Price of the base currency is calculated in units of the quote currency.
How are returns earned?
For example, you buy 1,000 units of USD. Assuming the exchange rate is SG$1.40 to US$1. So to buy 1,000 units of USD, this trade costs SG$1,400. A few days later, the SGD weakens against USD and the exchange rate becomes SG$1.55 to US$1. By selling the 1,000 units of USD you have, you would have made a profit of SG$0.15 x 1,000 = SG$150.
Why do investors like it?
Firstly, Forex trading can be performed 24 hours a day, 5 days a week because currencies are traded across all financial centres in the world. Furthermore, the Forex market is extremely large, clocking in at US$6.6 trillion (S$8.9 trillion) as of September 2019. Lastly, liquidity is high due to the large amount of activity that takes place daily. This lets traders enter and exit positions with ease.
Why invest in forex?
Liquidity
Forex market has the largest daily trade volume. Hence, in terms of liquidity, forex offers the highest liquidity. This allows forex traders to enter and exit any of their positions in the currencies easily and quickly in most situations.
24 hours
The forex market is traded 24 hours a day for five days a week. It starts the day in Australia and ends in New York. Major centers for forex trading are in Sydney, Singapore, Hong Kong, Frankfurt, London, Tokyo, Paris and New York.
Low transaction cost
As opposed to trading stocks where you have to pay both commission and the spread, forex trading requires you to cover only the spread. Hence, forex trading has lower transaction cost as compared to trading of stocks. The spread is the difference between the bid price (or selling price) and offer price (or buy price).
Pros and cons of Forex trading
Pros:
- You can trade at almost any day and time of the week
- Liquidity is high, allowing you to enter and exit positions easily
- Prices cannot be controlled by a single institution for extended periods of time
- It’s easy to get started, with brokers offering different types of forex trading accounts
- Leveraging on Forex trading allows you to control large positions and potentially increase your returns
Cons:
- But leverage is a double-edged sword, especially if you don’t fully understand it and don’t have sufficient capital to begin with
- The learning curve is steep, requiring months or even years to study and develop a trading system
- Volatility in the Forex market is high, creating sharp price hikes and drops in a short span of time
How to start investing in forex
- Step 1
Choose your desired trading brokerage
Before you can officially start forex trading, you have to have an account with a brokerage that allows for forex trading. Only after you have created an account, you would then be able to execute forex trades on the platform provided by the brokerage.
- Step 2
Stimulate your trade
When deciding what currencies you would like to trade in, it is ideal to have a forex trading plan. This plan will detail all the things you plan to do when you trade such as how you will conduct market analysis and steps to implement your trading strategy. It would be helpful to execute your plan on a demo account first.
- Step 3
Execute the trade
After creating your forex trading plan and testing the plan out on a demo account, you are ready to make your trade if there are no issues. Do note that forex trading has high risks and it may not be for everyone. Do do your own research and ensure that you are able to uptake the risk before you start trading on forex.
How to Choose a Forex Broker?
We helps you compare and choose your preferred Forex Broker. We suggest keeping the following checklist in mind when making your decision:
- Is the Forex Broker regulated?
- Account Details: Ideally, your broker should offer either a selection of account types or some element of customizability. Competitive spreads and easy deposits/withdrawals are good indicators too.
- Number of Currency Pairs offered: The variety of currency pairs on offer, as well as the quantity, should be considered (the more of both, the better).
- Availability of Customer Service.
- Quality of the Trading Platform: look for a platform that is easy to use, straightforward and offers a collection of technical and analytical tools to enhance your trading experience.
Choose the Top 10 Forex Brokers in the world.