Forex Trading is regulated and legal in Australia. If you are looking to trade forex then it is important to understand the risks & only trade via ASIC regulated brokers. We explain everything in this guide.
You can trade forex via forex brokers that are licensed with ASIC
6 Steps to Start Forex Trading for Beginners in Australia
|Broker Name||Highlights||Trading Fees (EUR/USD Avg Spread)||Account Minimum||Max. Leverage||Learn More|
Pepperstone Group Limited is regulated with ASIC with AFSL number 414530
with Standard Account
1:30 for Forex
| Open Account
International Capital Markets Pty Ltd is regulated with ASIC with AFSL number 335692
with Standard Account
1:30 for Forex
| Open Account
on IC MArkets
Foreign exchange market is a global marketplace where currencies are exchanged at different prevailing rates. International or offshore sales and purchases cannot be conducted without exchanging different currencies.
To get a fair value off the trade, the exchange of one currency in return for another is done according to a conversion rate. The conversion rate of each currency pair is different and can be affected by numerous economic, geo-political, and other factors.
By analyzing the markets, traders can predict the price movement of currency pairs and place buy or sell orders on them with leverage, called margin trading. Although, it is important to note that this is a high-risk market for Retail traders, and a majority of the beginners face losses in their initial phase of forex trading.
The Forex market involves various currency pairs that are divided into major, minor, and exotic pairs. EUR/USD is the most traded currency pair in the global forex market followed by GBP/USD. Any trading position on currency pair means the trader is buying or selling one currency in return for the other.
Let’s take an example, a buy order on AUD/USD means buying AUD and selling USD at the same time.
In simple terms, by opening a buy position on AUD/USD, the trader is buying AUD by paying USD in return.
In this case, the trader will earn a profit if AUD gains in value against USD or USD loses its value in terms of AUD. If a position is closed, the AUD will be sold back at the prevailing conversion rate of AUD/USD and the trader will receive the converted USD in return.
Forex is the largest capital market in terms of the daily trading volume. Unlike stock markets, the forex market is active throughout the day. The liquidity on the traded currency pair depends on the time zone in the local jurisdiction of concerning currencies.
For example, when the liquidity on USD/CAD is high, it will not be the same on AUD/JPY due to different time zones.
Lower liquidity means a lesser trading activity on the concerned pair and the difference between buy and sell rates (spreads) will increase dramatically during this period.
Forex Trading can also be done by exchanging physical currencies. However, through derivatives like futures contracts and CFDs, forex trading has become more accessible for retail traders. But at the same point, it is risky for retail traders.
CFDs on Forex do not involve physical buying and selling of currencies but the price difference is paid out or debited from the traders.
In Australia, several financial services providers offer Forex Trading on leverage.
Leverage allows traders to open bigger positions with smaller deposits. The risk factor increases with the increase in leverage.
Apart from market risk, there is also a counterparty risk or third-party risk of choosing a fake broker. To mitigate this risk, Australian traders must always choose a broker that is licensed/authorized by the Australian Securities and Exchange Commission (ASIC), which can be verified from the ASIC Connect’s Public Register.
Frequent buying and selling in the forex market in short tenure are called forex trading. The forex trader tries to make profits out of price movements of currency pairs. Most of the online forex trading is done via CFDs.
Losses are incurred if the price moves against the anticipation. Leverage makes forex trading riskier but also more profitable as it allows opening bigger positions with a smaller account balance.
There are several terminologies associated with forex trading. Acknowledging these terms is important to understand the working of forex trading.
1) Currency Pair: Forex trading is done on currency pairs in which two currencies are involved separated by ‘/’. The currency above or before the / is called base currency that is bought or sold in opening a position. The currency after or below the / is called quote currency that is used to buy and sell the base currency. For example, AUD/USD is a currency pair in which AUD is the base currency and USD is a quote currency.
2) Bid Price: Each time you see the price of a currency pair, there will be two prices. The price that the dealer is willing to pay if you sell the currency pair is called bid price. The bid price is lower than the ask price and is generally mentioned before the ask price.
3) Ask Price: The ask price is the price that you will pay or the price dealer is willing to accept if you buy the base currency. The ask price or buy price is slightly higher than the bid price. For example, the price of AUD/USD will be denoted as 0.7287/ 0.7291. In this example 0.7287 is the bid price in USD at which the dealer is willing to sell 1 unit of AUD. 0.7291 is the ask price in USD at which the dealer will buy 1 unit of AUD.
4) Spread: In the above example, you can see the slight difference in the bid and ask price of the currency pair. This difference between the bid and ask price is called the spread. It is a type of fee that is paid to the dealer for creating and accommodating the market. Higher spreads mean more earning for the dealer and lesser gains for the trader and vice versa. If the spread is 0, the bid and ask price are equal. The spreads are generally denoted as the fourth decimal point in a currency pair. If AUD/USD is trading at 0.7287/ 0.7291, the spread is 0.0040 or 40 pips.
5) Pips: Pip or percentage in points is the smallest unit at which the prices of a currency pair can fluctuate. Most of the currency pairs fluctuate by four decimal places as the smallest change. If AUD/USD is trading at 0.7287/ 0.7291, then the smallest movement possible will be 0.0001 or 1 pip.
6) Lots: Forex trading is done in fixed lot sizes. A standard lot of a currency pair involves 1,00,000 units of the base currency. Generally, the minimum lot size that can be traded is 0.01 lot or 1000 units of the base currency. 1000 units of the base currency are also called a micro lot.
7) Leverage: Forex trading is commonly done with leverage. Since there is a very small price movement, leverage plays an important role to book higher profits with smaller deposits. Leverage is the fund borrowed from the dealer to open any position in forex trading. If a broker offers a leverage ratio of 1:100 on forex, it means that 99% of the amount in the opened position is leveraged or loaned from the broker. Bigger positions can be opened with leverage with a smaller deposit amount. Excessive leverage increases the risk factor as losses are to be covered by the trader.
8) Margin: It is the amount that the trader is required to pay to open a certain position in forex trading. Suppose if 1:100 is the leverage ratio then 1% of the overall cost of the position has to be paid by the trader initially. Any opened position in forex trading is worth margin amount + leverage amount.
9) Buy/Sell Order: Each currency pair can either be bought or sold. If a trader has placed a buy order, he would want the price of base currency to increase and quote currency to decrease. This is commonly called a long position in forex trading. In a short position, the trader has sold the base currency and will gain if the price of the base currency decreases. Going long as well as short is quite convenient in forex and CFD trading compared to other asset classes.
10) Stop Loss/Take Profit: These are the type of limit orders which can greatly assist in forex and CFD trading. The stop loss feature allows traders to limit the losses or protect the profits. The take-profit features allow traders to automatically take the profits if a target is achieved. If the set stops loss or take profit target price is triggered, the position is closed automatically. Stop loss and take profits can be set while placing the order and can also be placed or modified after opening the position.
Forex trading can best be learned with experience. It is a high-risk market and traders must use demo trading where they can gain experience with virtual currencies. It is a high-risk capital market and is not ideal for every type of trader. One must check the suitability, objective, and risk elements thoroughly before entering the forex market.
Forex trading in Australia is legal and in compliance with a strict regulatory framework. The Australian Securities and Exchange Commission is the regulatory authority that regulates forex trading in Australia.
There are a lot of Forex and CFD brokers in Australia that are regulated by ASIC and offer leveraged trading on forex and other instruments. Trading with brokers that do not have a regulatory license from ASIC is illegal in Australia.
The first and foremost thing to do as a trader is to choose an ASIC-regulated forex broker in Australia. Brokers without ASIC regulation in Australia have high third-party risk and must be avoided.
Most of the brokers display their regulation details on the footnote of their website. Some also have a separate page on their website. If not available, clients can also ask the customer support executives to provide the license or registration number of the ASIC license.
The ASIC regulatory license can be cross-checked from the official website of ASIC. There is a separate page to search for license details under ‘search company and other registers’ > ‘professional registers’. Clients can search for license details either with the name of the broker or the license number. This detail must be checked before choosing a forex broker in Australia.
After checking the license, potential traders should also check and compare the fees, available instruments, trading platforms, customer support, and other details of the broker. Online reviews by professionals and existing clients can also be read to get a glance at trading experience with particular brokers.
The next step to trade forex in Australia is to open a trading account with the selected broker. The account opening process is simple but each broker takes a different time to complete this process. Following are the details that the trader needs to provide to the broker to open an account.
1) Your Full Name: The name should be the same as that on Identity and address proofs and bank accounts. Any spelling mistake will not allow you to open the account.
2) Your Contact Details: This includes the mobile number and email id. The entered contact details will be cross-checked via OTP.
3) Current Address: You must have proof of the address where you are currently living.
4) Country of Residence
5) Documents: The proof of identity and address will be verified by the broker to complete the KYC process. This process can take 2 hours to 2 days depending on the service efficiency of the broker.
6) Deposit: You will receive a confirmation mail from the broker once the KYC process is completed. The trading can now be started after making an initial deposit. The minimum initial deposit amount requirement can differ from broker to broker and must be checked before opening the account. Time taken to process the transaction is also different for every deposit and withdrawal method.
For new clients, it is always advised to trade with a demo account and gain a decent amount of experience before risking real money. The demo account can also be used to check the success rates of trading strategies and suitability with different trading instruments.
The cost that will be incurred to traders in forex trading will differ from broker to broker. Each broker charges different types of fees and the amount of fees can also be different.
Spreads and commissions are the major source of revenue for the brokers and liquidity providers.
To be familiar with the fee structure, clients must check or inquire about the following components of fees before opening the account.
These are the common ways in which a forex broker will charge the traders in Australia for trading.
1) Spreads: Spreads are the major component of fees involved in forex trading. This is the difference between the bid and ask price or the buy and sell price.
Wider spreads mean lesser profit and lesser probability to make profits in a forex trade. Clients should seek brokers that offer narrower spreads.
2) Trading Commission: The commission that is incurred while executing trade orders is called a trading commission.
Some brokers offer commission-based trading on currency pairs with low spreads or zero spreads. Commission-based spread-free trading is considered ideal for large volume traders and scalpers.
A commission on forex pairs can range from $2 to $10 for a Roundturn trade (both sides) of a Standard Lot. Details of commission (if charged) must be checked before opening the account.
3) Swap Fees: Swap fees are also called overnight charges. These are the charges that are incurred if a trading position is kept open overnight.
Orders that are opened and closed on the same day will incur no swap fees at all.
For every night the position is kept open, the swap fees will be added. Swap rates or overnight charges differ from broker to broker on every instrument.
4) Non-Trading Charges: These are the charges that will be incurred without executing trade orders. Non-trading charges can be of various types and can be tricky to identify as they are not clearly mentioned.
5) Inactivity Fee: An inactivity fee is a fee that gets deducted from the account balance if no trades orders are executed in a prolonged period of 3 months to 1 year.
6) Deposits & Withdrawals: Deposits and withdrawals can incur additional commission for some or all of the methods. Clients must check the commission or fees for deposits and withdrawals.
Other non-trading charges include account opening fees, conversion fees, internal transfer fees, etc. Subscription to additional services can also cost additionally.
Clients must enquire from the support executives about the non-trading charges separately.
There are plenty of risk elements involved in forex trading. We have discussed some of the major components of the risk in trading forex in Australia.
Online forex trading has attracted thousands of retail investors in Australia. Trading with a trusted and well-regulated broker ensures your funds are in safe hands. If something goes wrong, there is a security mechanism that comes into play to protect your investments.
National, as well as major Tier-1 Forex Broker regulators, ensure that brokers offer fair and transparent trading environments. They set standard criteria and reporting requirements for a forex dealer before providing services to its clients. They also continue to monitor broker’s trading practices and in case of wrongdoing, the financial regulator can cancel the broker’s license.
Before choosing, ensure that your broker is well regulated and trustworthy. Don’t get persuaded by Pyramid schemes or fake agents offering unbelievable and unrealistic returns. There are plenty of examples of when retail investors lost their money to fake brokers and Ponzi schemes.
The best way to avoid this risk is by selecting a broker having Tier I or Tier II licenses. Tier I indicates the highest level of trust, and Tier II has a low level of confidence. UK, European, American, Australian, and Canadian regulators score well on their trust level and are called Tier I regulators.
Traders based in Australia must only trade with forex brokers that are regulated with ASIC. You must check the products for which the forex broker/firm has been Authorised, verify the Firm’s Reference No. and their website from FCA’s Register. Only this will ensure that you are trading with an authorized firm.
This is the risk of extraordinary price swings in currency pairs. Forex is a complicated market as the price movement depends on a countless number of factors. It is active throughout the day and any event across the globe can have an impact on the price movements. It is nearly impossible to correctly predict the price movements. Research and analysis can greatly enhance the success rates but the market risk will always prevail in the forex market.
The leverage allows traders to open bigger positions with smaller margin requirements. High leverage can help in booking higher profits in case of favorable outcomes. The extent of profits, as well as losses, depends on the size of the opened position. The bigger positions can provide dramatic losses and can also wipe out your account balance completely if a position is not closed.
Beginners should not involve too much leverage in trading forex in the initial phase. Leverage of more than 1:10 is considered risky. The Australian Securities and Exchange Commission (ASIC) has restricted the maximum leverage that CFD brokers can offer to 1:30 for major forex pairs. The maximum leverage is lesser for CFDs on indices and commodities to protect the traders from high leverage risk. Although, clients can increase their leverage if they fulfill the ASIC criteria to become a professional trader.
Forex trading is mostly done online through trading platforms on mobile, tablets, and PC. A technical glitch can disrupt the trading experience. Traders can miss out on trading opportunities due to slow internet or processor issues.
The timing to open or close a position can vary due to technical problems. Accounts can be hacked. The account credentials and passwords must be protected. Public wi-fi networks must be avoided. Fingerprint or facial recognition to login into an account can enhance the safety of traders.
Yes, Forex trading is legal in Australia, and you must trade with ASIC Regulated Forex Brokers. All forex trading activities & brokers must comply with the regulatory guidelines of ASIC and the profits made are subject to tax implications.
Forex trading in Australia can be done by opening a Live Trading Account with any of the ASIC-Regulated forex and CFD broker in Australia.
No, forex trading is not profitable for most of the retail traders as a majority of the new retail traders face losses in the initial phase.
It is a high-risk capital market and is only ideal for experienced traders who can analyse the price movements of currency pairs. 70% to 80% of beginners lose money in Forex Trading.