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
First Prudential Markets Pty Ltd is regulated with ASIC with AFSL number 286354
with Standard Account
1:30 for Forex
| Open Account
on FP Markets
eToro Aus Capital Ltd is regulated with ASIC with AFSL number 491139
with Standard Account
1:30 for Forex
| Open Account
IG Markets Limited is regulated with ASIC with AFSL number 220440
with Standard Account
1:30 for Forex
| Open Account
on IG Markets
Plus500AU Pty Ltd is regulated with ASIC with AFSL number 417727
with Standard Account
1:30 for Forex
| Open Account
Forex trading is like a global market where people trade different currencies. Imagine you have two kinds of money, let’s say dollars and euros. You want to exchange some of your dollars for euros because you think the euro might become more valuable.
So, you go to this big market, and you find someone who wants to trade their euros for your dollars. You agree on a price, make the trade, and now you have euros instead of dollars. If the euro’s value goes up, you can exchange it back for more dollars and make a profit.
But it’s a bit like a game because the values of currencies keep changing all the time. So, you need to be careful and think about when to trade to make money. Forex trading is like playing with money from different countries and trying to win by trading them at the right time.
The foreign exchange market, or forex market, serves as a global platform for the exchange of currencies at prevailing rates. It facilitates international transactions by necessitating the exchange of different currencies. To ensure a fair trade, currencies are exchanged based on conversion rates, which vary for each currency pair and are influenced by a multitude of economic and geopolitical factors.
Traders engage in the forex market by analyzing these factors to predict the price movements of currency pairs. Leveraging their insights, they place buy or sell orders through margin trading. However, it’s crucial to recognize that forex trading carries a high level of risk, and many beginners face initial losses.
The forex market offers a diverse range of currency pairs, categorized as major, minor, and exotic. The EUR/USD pair is the most heavily traded globally, closely followed by GBP/USD. Trading in any currency pair signifies the exchange of one currency for another, underlining the intricate dynamics of this financial market.
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 daily trading volume. Unlike stock markets, the forex market is active throughout the day. The liquidity of 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 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.
There are three main ways to trade in foreign exchange: spot, forward, and future.
The spot market is also known as the ‘cash market,’ where currencies are bought and sold and delivered on the spot. The price of a currency in the spot market is determined by demand and supply. That means the more the demand for a currency higher the value of that currency.
However, it’s not that simple. Some countries intentionally keep the currency values low to make export cheaper or attract foreign investments. The currency value is calculated on many factors, such as interest rate, market sentiment, political change, and economic news.
The final deal between one party that sells an agreed-upon currency price and the other that buys that agreed-upon exchange rate is known as a ‘spot deal.’ Once you close the position, you receive the specified amount of that currency in cash. Although the spot deal is considered spontaneous, the cash settlement usually takes two days.
A private agreement between the two parties to buy a currency at a future date and the pre-agreed price is a forward contract. Let’s take an example to understand how a forward contract works.
Assume that a UK car company wants to secure a contract for a future purchase of spare parts from X, which is located in the US. The UK company signs an agreement with the US company to buy the spare parts after six months.
Both agree for a future exchange rate of 1 GBP = 1.3700 USD, and at the time of the agreement, 1 GBP is equal to USD 1.3700. Now suppose, after six months, the value of one dollar drops to 1.3800. That means the importer will benefit by USD 0.01 per unit of the exchanged currency. Now reverse the situation, the price of one dollar increases to 1.36.
In this case, company X (exporter) will benefit from the forward contract to hedge their risk. The vital thing to note is that currency value can move in any direction, either up or down. Who benefits from a forward contract depends upon the value of one currency against the other after six months.
A future agreement is similar to a forward contract; the only difference is that the latter is a standardized contract. The futures contract is a standard contract that specifies the quantity of a particular asset at a pre-determined price and delivery date.
For example, suppose Indian Oil signs a future contract to import 1 million barrels of oil with an oil producer based in Saudi Arabia. The oil producer promises to deliver the specified quantity in twelve months at a pre-agreed price of $75 per barrel.
So even when the price of one barrel falls to $70, the importer is obligated to pay the premium. The same is true when the price reaches $80; the oil producer will deliver the quantity despite the changes in the spot price.
Frequent buying and selling in the forex market in short tenure are called forex trading. The forex trader tries to make profits out of the 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 the 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 which 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 the 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 earnings for the dealer and lesser gains for the trader and vice versa.
If the spread is 0, the bid and ask prices 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 the base currency to increase and the 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 losses or protect their 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.
11) Support and Resistance: Support and resistance are quite popular indicators in technical analysis. The support and resistance are the specific prices of a financial instrument that are likely to reverse the course of price trends. Support is the lower point or bottom while resistance is the upper level or ceiling. Falling prices are likely to halt or increase after reaching the support level. Rising pricing will stop moving upward after reaching the resistance.
Some terminologies are based on market activities and traders must acknowledge these to understand price movements in the forex market.
Bullish trend or bullish market is a commonly used term in financial markets to denote appreciation in the price of the asset. For example, a continuous rise in prices of a commodity or stock for a prolonged period will be called a bullish trend.
In a forex pair, a bullish trend can be due to appreciation as well as the depreciation of one currency with respect to other. For example, a bullish trend in EUR/USD currency pair represents an appreciation of the EUR and/or depreciation of the USD.
A bearish trend or bearish market is exactly the opposite of a bullish trend. Continuous depreciation in the price of an asset is commonly denoted as a bearish trend.
In the forex market, appreciation of quote currency and/or depreciation of base currency can be called a bearish trend on a currency pair.
GDP or Gross Domestic Product is the total value of all the goods and services produced in a country in a particular time period. It is a popular indicator that represents the overall health of a nation’s economy.
Growth in GDP can be compared with other nations to predict the increase or decrease in the price of a currency pair. For example, in a hypothetical currency pair ABC/XYZ, the GDP of the country with ABC currency increases more than the GDP of XYZ nation. This means ABC is growing faster than XYZ and the price of ABC in terms of XYZ is very likely to increase.
Inflation means a rise in prices in a nation over a time period. There are multiple factors in an economy that can increase or reduce inflation. Each country has different inflation rates at a particular time interval.
The inflation rates of two currencies involved in a currency pair can be compared to predict the price movement of a currency pair. The country with a higher rate of inflation will lose its value against the one that has a lower inflation rate.
The interest rate of a country that is also known as the repo rate is the basic rate at which the central bank will provide loans in a particular nation to commercial banks. Interest rates also depict the rate at which investors can earn through fixed deposits in the country.
Interest rates are decided by the central bank or the monetary authority of a nation. Interest rates can be comprehended to predict the price movements in a currency pair.
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.
Understanding forex trading can be complex for those who have never traded on any financial instrument online in the past. Those who have a slight experience of trading other capital markets like stocks, cryptocurrencies, or CFDs would be very comfortable with forex trading.
Let us understand the complete process and working methodology of the forex market with the help of an example.
Online forex trading is done through a trading platform which is software that can be downloaded on electronic devices. The trading platform connects traders to brokers, liquidity providers, and other forex traders.
Traders place to buy or sell orders through trading platforms on their preferred trading instruments. The exposure and profit/loss depending on the volume traded and the leverage involved.
Leverage of 1:10 will allow you to open a position worth $100 exposure with $10 in your trading account.
In this example, we will take the leverage of 1:10 on EUR/USD currency pair. The supposed market price for EUR/USD is 1.2100/1.2102. This means that the bid price is 1.2100 (the price that the dealer is willing to pay) and the ask price is 1.2102 (the price at which the dealer is willing to buy) and the spread is 2 pips (difference between the bid and ask price at 4th decimal).
First, we will place a buy order for 1 standard lot (100,000 units of the base currency). To place a buy order of 1 standard lot on EUR/USD, the following will be the calculation of the required account balance.
$1.2102 * 100,000 * 1/10 = $12,102
(ask price) * (units of base currency) * (leverage ratio) = (minimum account balance required to open the given position)
Now suppose the price of EUR/USD went up by 100 pips and reaches 1.2200/1.2202. By closing the buy position at this price, the following will be the profit.
(1.2200 * 100,000 * 1/10) – $12,102 = $12,200 – $12,102 = $98
(bid price * units of base currency * leverage ratio) – (exposure) = Profit/Loss
Now let us understand the same scenario with a short position on EUR/USD with 1 standard lot at the current market price of 1.2100/1.2102. Following will be the exposure amount in a short position.
$1.2100 * 100,000 * 1/10 = $12,100
(bid price) * (units of the base currency) * (leverage ratio) = (minimum account balance required to open the given position)
Now suppose the price of EUR/USD went down by 150 pips and reaches 1.1950/1.1952. By closing the position at this position, the following will be the profit.
$12,100 – $(1.1952 * 100,000 * 1/10) = $12,100 – $11,952 = $148
exposure – (ask price * units of base currency * leverage ratio) = profit
It must be noted the exposure amount ($12,102 in the long position example and $12,100 in the short position example) will be at risk of capital markets. If the leverage is high, the profit/loss amount will move more with the change in the pip value of the underlying asset.
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 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.
The account opening process at every ASIC-regulated broker is nearly similar. However, the process and time required to open the live account can vary from broker to broker. Following are the steps to open a live trading account in Australia.
Step 1: Select a Broker
Traders must check and compare every aspect of the broker and choose the most suitable broker with regulations, low fees, availability of desired instruments, helpful customer support service, convenient deposit and withdrawals, and a user-friendly trading platform.
Step 2: Visit their Website or Download the App
After choosing the broker, you need to visit their official website or download the application to open the account.
Step 3: Enter Basic Details
The first signup process involves providing basic details like name, phone number, email, and country of residence. Some brokers may ask for a few more details.
Step 4: Select Account Type
Most forex and CFD brokers offer more than one account type with different pricing structures, trading platforms, or trading conditions. Traders must choose the most suitable account type while opening their accounts.
Step 5: Document Verification
After configuring the account and answering a few basic questions related to forex trading, traders are required to verify their documents by uploading soft copies. Brokers will ask for name and address proof which can be done with a passport, national identification document, etc. Each broker can take different times to verify the document ranging from 2 hours to 24 hours on business days.
Step 6: Deposit Funds
Once the account has been verified, clients can deposit funds through the accepted methods from the website or application of the broker. It is important to check the associated fees and time required to process the transaction.
Step 7: Download the Trading Platform and Start Trading
Once the deposits are visible in the account equity, you can open trading positions on available instruments through the trading platform. The trading platform can be downloaded on mobile and desktop devices and can also be accessed through the web.
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.
Clients opening their accounts with an ASIC-regulated broker in Australia are registered under ASIC laws and regulations. Following are the major regulations on forex trading in Australia.
ASIC aims to keep the capital markets fair and transparent for the traders and to ensure the protection of traders in financial markets. Australian traders must always choose a broker that is regulated by ASIC of Australia.
The cost that will be incurred by 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 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 trade 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.
Trading without strategy is like sailing without a compass. The sailor has no idea about the wind speed or the direction. That’s why the practice of forex analysis plays a vital role in currency trading. You look at the changes in the values of currency pairs and the forces that are influencing those price movements.
Traders use both fundamental and technical analysis for creating a profitable strategy. Many expert traders combine both techniques to take a hybrid approach. In short, the knowledge of technical analysis will tell you when (to buy or sell) and fundamental analysis tells you why (the price movements). Both are indispensable weapons for a successful forex trader.
Let’s deconstruct both methods one by one.
What economic factors will impact the demand and supply of a currency? Welcome to Macroeconomics 101, the law of demand and supply. If the demand for a currency is increasing, the trader may assume the prices will rise. On the other hand, a demand reduction may be an indication of an eventual fall.
However, it’s not that simple! There are many factors such as economic health, political stability, global events, and others that influence the expansion and contraction of a particular currency. For instance, the US Sub-Prime Lending Crisis in 2008 caused a massive breakdown of financial systems worldwide.
The fundamental analysis generally involves the following economic indicators:
In addition to global economic events, the localized changes in a national economy can also influence the currency prices of that country. For instance, the increased commodity prices globally can strengthen Australian dollars.
Although government changes are not a frequent affair, currency prices can be affected during a transition period. Developed countries have relatively stable regimes in comparison to developing countries. Political instability is the main reason why the currencies of many African countries are so unpredictable.
Central banks use monetary policy as an effective tool to control the demand and supply of a currency. They can reduce the interest rate in an economic slowdown and can increase to curb the inflation caused by economic growth. The fiscal policy entails taxation and government spending. Higher taxes can drive slower credit and economic development. Both government policies can have a significant impact on the national currency.
Main participants such as banks, financial institutions, or hedge funds may buy or sell a specific currency to up or down the prices. You will be in much better positions if you have an idea about the main speculators of the forex market.
Main participants such as banks, financial institutions, or hedge funds may buy or World governments publish statistical data and reports that reveal the economic health and performance over a period. Many financial reports like employment data, inflation rate, GDP, and foreign exchange reserve can indicate regional economic conditions, which can dramatically impact the local currency. A forex dealer can use an economic calendar to avoid unwanted surprises from the release of new data.
Charts and graphs are the primary tools of technical analysis. Charts help traders identify historical performance, ongoing trends, and price movements and calculate risk to maximize gains from currency trading.
Understanding different charting formats such as line, bar chart, and candlestick is essential to develop a solid trading strategy for beginners. The following are important terminologies associated with technical analysis.
It is the most basic charting which helps users select a currency and its performance for a fixed period. The bar chart shows the highest and lowest currency price points and average performance over the period chosen.
It also displays the same information: open, low, high, and close. However, the representation of data is very different from the bar chart. It becomes easier for users to see the highest and lowest peaks of the currency movements with thin vertical lines.
Trend is a term used in technical analysis of capital markets that depicts the direction of the price. Generally, the price of the underlying instrument moves in a particular direction until a trend reversal is witnessed. The tops and bottoms of the charts can be analysed to identify the price trend at a given time.
Trendlines and trend reversal are very important components of technical analysis. A higher-high price action followed by a higher low represents an uptrend (bullish) while a lower low and lower high depict a downtrend in price movement.
Support and resistance are the prices at which the trends are likely to reverse or stop moving further in that direction. There can be multiple support and resistance levels for a single financial instrument.
Support is the lower limit at which the price trend is likely to reverse or stop moving further below. Resistance is the upper limit on the price trend. Whenever a resistance or support level is broken, the price moves significantly. These limits are created due to trend reversals and stagnancy of prices at the price that same particular level. A support or resistance level gets stronger every time it resists the price movement.
As the name suggests, the moving average is an important indicator that depicts the average price movement in a given time. A moving average indicator creates a series of averages of different subsets of the full data sets of prices in a particular time interval. Current prices below the moving average depict a buying opportunity while the prices above the moving average may benefit the sellers.
Fibonacci retracement levels are based on the Fibonacci sequence and are used to identify potential support and resistance levels. Traders use these levels to determine potential price retracement areas during a trend.
Bollinger Bands consist of a moving average (typically 20-day SMA) and two standard deviations above and below the moving average. They help traders identify periods of high or low volatility and potential price breakouts.
Candlestick charts display price data in a visual format using candlestick patterns. Traders analyze patterns such as doji, engulfing patterns, and hammers to identify potential trend reversals or continuation.
Volume analysis examines trading volume accompanying price movements. It helps traders understand the strength or weakness of a price trend and identify potential reversals or breakouts.
Chart patterns, such as head and shoulders, double tops, and triangles, are formed by price movements and can indicate potential trend reversals or continuations.
There are hundreds of strategies that are used in the technical analysis of financial instruments. Technical analysis works well on instruments with high liquidity like the forex market.
Experienced traders often use technical analysis in combination with fundamental analysis to understand why the value of a currency rises or falls for the selected period. For example, if the fundamentals indicate that the US Dollar will strengthen against the Euro due to policy divergence, and the technical analysis also indicates the same, then it is much more likely that your strategy may be successful as compared to incomplete research.
You can use simple mathematical tools such as moving averages, trend lines, and others for technical analysis. You can learn about more advanced concepts like Elliott Wave Theory, Fibonacci Studies, and Pivot Points as you progress.
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 brokers’ 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, and 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 countless factors. It is active throughout the day and any event across the globe can have an impact on price movements. It is nearly impossible to correctly predict price movements. Research and analysis can greatly enhance the success rates but 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 favourable 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 fulfil 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.
Forex trading involves buying and selling currencies. These currencies are used for day-to-day activities in respective countries. Each country has different growth rates and interest rates. Their price trends will be different for each pair.
The sudden price movement on any currency pair can occur at any time due to different reasons. A country might implement expansionary or contractionary monetary and fiscal policies that can affect price trends. Country risk is more effective in automated trading as policies implemented by countries can alter the course of price trends.
There are multiple risk elements in the forex market. Choosing the right broker, taking informed decisions, technical and fundamental analysis, and other precautionary measures will reduce the risk factor. However, risk in the forex market can be mitigated but cannot be removed completely.
Leveraged forex trading involves significant financial risk. Forex trading is easily accessible for retail traders. More than 70% of forex traders face losses. It is always advisable to use the demo account and trade with virtual currencies before trading with real money. This will also allow traders to know whether forex trading is suitable for them or not.
To mitigate these risks, forex traders should:
Risk management techniques in forex trading
Position Size: Determine trade size based on account balance and risk tolerance (1-2% per trade).
Stop-Loss: Set stop-loss orders to limit losses if the market moves against you.
Take-Profit: Use take-profit orders to secure gains at a predefined level.
Risk-Reward Ratio: Aim for favorable risk-reward ratios (1:2 or better).
Diversification: Spread risk by trading different assets, not all in one.
Control Leverage: Use leverage carefully to align with risk tolerance.
Trading Plan: Develop a clear plan with entry/exit rules and risk limits.
Emotions: Manage emotions to avoid impulsive decisions.
Stay Informed: Be aware of market events that could impact trades.
Monitor Trades: Adjust stop-loss and take-profit levels as needed.
Review Trades: Analyze trades to learn and improve strategies.
Avoid Revenge Trading: Don’t trade impulsively to recover losses.
Forex trading can be rewarding, but it is crucial to approach it with a clear understanding of the risks involved and to trade responsibly. Traders should consider seeking advice from financial professionals and only trade with money they can afford to lose.
There are some pros for traders trading in the forex market over other financial markets. But you must understand all the risks before making a decision whether to trade forex & CFDs or not..
Following are the advantages of trading forex:
You invest in the world’s largest financial market. With daily transactions crossing over USD 5 trillion, the sheer size of the forex market makes it truly a global marketplace with several profit opportunities.
The forex market operates around the clock so that you will find a trading opportunity any time of the day in at least one global time zone. As the forex market is a decentralized OTC market, its working hours are not subject to any centralized exchange system. For instance, trading hours begin at 5 PM EST in the USA on Sunday and roll continuously with other markets until Friday at 5 PM. Note that even though currency trading is restricted for retail traders on weekends, the exchange rate keeps moving.
In addition to very low investment requirements, even the transaction cost of trading forex is relatively lower. For instance, you can start dealing in currencies with just USD 100 or even lower. The main earnings of a broker comes from the bid-ask spread. Spread is measured in pips, the difference between the sell and buy price of a currency. However, some brokers do charge a commission or flat fees per transaction. You should factor in commission and spread while choosing a broker to lower your overall trading cost.
The availability of high leverage is perhaps the main reason why forex trading appeals to so many people. It enables you to place a higher trading order with minimum capital.
Almost all the forex brokers offer leverage where you can borrow against deposited money in your trading account. It’s similar to taking a mortgage against your property; the only difference is that the margin requirement is very low. For instance, you can place a USD 100 order with just 3.33 US dollars if your broker offers a 1:30 leverage ratio. However, leverage is a double-edged sword. It can amplify your losses, so heed caution when trading forex with leverage. You should avoid using high leverage.
Forex market is also the world’s most liquid market. Liquidity refers to how quickly an asset can be sold or bought without affecting its value. Major currency pairs such as EUR/USD or USD/JPY are considered most liquid than exotic currency pairs.
Major pairs are more liquid hence the spread will be lower on major pairs. The spreads on less traded pairs are higher due to low liquidity.
The same volatility, which makes it riskier for traders, can also present ample profit opportunities. Volatile market conditions cause rapid changes in the value of currency pairs, thus, increasing your chances of gains from the trade.
But this is also a big risk. If a currency pair changes in its value by a lot then it is considered volatile and can be a risk for investors as you can lose big if you are on the opposite side. For example, USD/TRY is considered a very volatile currency pair. You may lose quickly if you are in the wrong position, also you must consider the Swap Rates when trading such currency pairs.
Scalable means you can trade in mini, micro, or standard lots, making it easier for traders to control investment size and capital exposure.
You don’t have to spend money on acquiring expensive hardware and software to start with forex trading. All you need is a computing device or a smartphone with a reliable internet connection. Your broker will provide charting and trading technologies at no cost once you subscribe.
Following are the challenges or disadvantages of trading forex:
Forex market is not ideal for many traders due to its high risk. The market risk in forex trading is much higher compared to other capital markets like stocks, commodities, etc. The involvement of leverage further increases the risk of losing a substantial amount within a few seconds.
The market is active 24 hours a day and any news event around the globe can affect the prices of currency pairs. Hence, at times it becomes impossible to correctly predict the price movement.
There is no particular location from where the forex market is controlled or managed. Foreign currencies are exchanged in many ways mainly through central banks, private banks, large financial institutions, etc. The forex market is largely influenced by large-scale market makers, liquidity providers, and banks. Hence, there is no transparency about how the trade order is getting executed. The trading volume and market sentiment are also difficult to predict in the forex market.
The value of one currency in return for another keeps on changing due to multiple reasons at every minute. It is quite complex for retail traders to calculate the valuation of one currency in terms of another. The valuation depends on the economic and financial details of the involved currencies and their predictions. Compared to other capital markets, it is much more complex to do a valuation of the currencies.
Stocks, commodities, and other markets are much easier to comprehend compared to the forex market. In the stock market, traders can get assistance from experts and portfolio managers. Comparatively, it is challenging to learn forex trading and understand the forex market. Traders have to learn most of the forex trading on their own.
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.
For beginners, it is better to gain experience through a demo account where they can test their suitability and strategy through virtual currency. Traders can also get familiar with the terminologies and basics of forex trading through demo accounts. After that, it is better to trade on small lot sizes with small initial deposits in the beginning.
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. After opening the account, traders need to make a deposit to start trading forex pairs in Australia.
As a beginner, you should trade with a small lot size after gaining experience through demo accounts. Beginners should spend more time and effort on learning and researching before making a trading decision. Beginners should make emotion-driven trading decisions.
Yes, capital gains or profits booked through forex and CFD trading in Australia are liable for capital gains tax as per the prevailing capital gains tax rates in Australia.
Beginners in forex trading should start with a demo account. After getting decent experience, traders must start with a small amount in the beginning. They should keep strict limits of stop loss and take profits. Beginners should spend more time and effort on building strategies and research & analysis.
For beginners, it is good to start with a low deposit of less than $50. However, each broker has different limits for a minimum deposit. Beginners in forex trading must choose a broker that requires a low minimum deposit.
EUR/USD is the most traded currency pair in the world. It has high liquidity and the least spread during peak trading hours. Hence, EUR/USD can be the most suitable currency pair for beginners. However, traders should only trade with the instruments that are familiar to them.
No, ABN is not mandatory for retail traders in Australia. However, if you are trading on behalf of a firm residing in Australia, ABN is mandatory. Retails traders are identified as sole traders and do not need ABN for trading.
Yes, $100 is a decent amount to start forex trading. Traders must practice and gain experience through a demo account before starting to trade with real money.
Forex trading can be learned online through various educational websites, videos, blogs, articles, and other educational materials. It can also be learned offline through books. A demo trading account is the best method to learn about forex trading. It can help a beginner to check suitability, test the strategies, and gain experience in the forex market.
No, forex trading is not profitable for most 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 forex traders lose money in Forex Trading.