Investing

A Basic Guide to Forex Trading

If you have ever looked into the world of investing, you might have heard of the term "forex." Maybe you even know of a couple people who have made or lost a lot of money by trading forex. Here, we break down the basics of forex trading and help you get started in this fascinating field.

What is Forex Trading?

Forex is an acronym for Foreign Exchange. Other names commonly used in the marketplace are FX and Currency. Forex trading is an activity where speculators participate in the global financial markets with the objective of profiting from the price movements between currencies.

Example: Let’s say you buy 1,000 units of US Dollar when the exchange rate is S$1.30 to 1 US Dollar. This trade will cost you S$1,300. A week later the Singapore Dollar weakens to S$1.40 against the US Dollar and you decide to sell your currency. You have made a profit of S$0.10 per unit x 1,000 units = total S$100.00 profit.

SGDUSDFX
BuyS$1,300$1,000S$1.3/USD
SellS$1,400S$1,000S$1.4/USD
ProfitS$100

Who can participate in Currency trading?

Anyone can participate in Forex trading but must use a licensed broker or dealer to access the market. Individual participants in the FX market are referred to as Retail Traders, while banks, corporations and large funds are called Institutional Traders.

Where is the FX market based? What are the trading hours?

Unlike stocks and commodities, currencies are not traded at an exchange. The Forex market consists of a global network of computers which connects licenced dealers, brokers, banks and institutions.

The FX market does not have official trading hours. You can place a trade whenever your chosen platform allows, which is typically 24 hours per day from Monday to Friday.

How big is the Currency market?

The Forex market is by far the largest and most liquid financial market in the world. Its trading volume is $5.3 trillion a day, 30 times larger than that of the New York Stock Exchange (NYSE), one of the biggest stock markets in the world. The sheer size and liquidity of the FX market is advantageous to traders as entry and exit is immediate because there are always counterparties available for a trade.

Is Forex trading risky?

Yes. All financial investment and speculation carry risk, but FX activities are even riskier because leveraged trading is employed. You can lose more than the funds in your trading account.

What is leveraged trading?

Put simply, your broker lends you the money to trade currencies and requires you to pay only a security deposit upfront to cover any losses. Leverage is popular to Retail Traders as they can take larger positions in the market and benefit from even small currency movements. However, the flipside is also true i.e. when the market moves against you, then your potential losses are also magnified.

Let’s consider an example. You only have S$1,000 of your own money to trade forex. To juice your returns, you decide to borrow S$1,500 from your broker and trade with more capital (S$1,000 + S$1,500 = S$2,500). If you make 10% return, you end up with a profit of S$250. After you repay your debt, you end up with a 25% return on your capital of S$1,000, which is much more than what you would have made on your own money with the same 10% return (S$100). In this example, we assume that the interest you pay on the borrowed amount is miniscule.

No LeverageLeverage
Equity CapitalS$1,000S$1,000
DebtS$0S$1,500
Total CapitalS$1,000S$2,500
Leverage Ratio1x2.5x
Return On Capital10%10%
ProfitS$100S$250
Return On Equity10%25%

On the flipside, if you lose money on your trade, your loss will be amplified as well. Let’s assume you again have S$1,000 and borrow another S$1,500, but you lose 10% on your trade. Since you have to return the S$1,500 that you borrowed, you will be left with S$750 of your own money, translating to a 25% loss instead of a 10% loss you would have incurred.

No LeverageLeverage
Equity CapitalS$1,000S$1,000
DebtS$0S$1,500
Total CapitalS$1,000S$2,500
Leverage Ratio1x2.5x
Return On Capital-10%-10%
Loss-S$100-S$250
Return On Equity-10%-25%

Do people make money from Currency Trading?

There are many traders in history that have made vast fortunes, or at least partially, from FX trading. To name a few, George Soros is reportedly worth $24 billion, Stanley Druckenmiller $4 billion and Steve Cohen $13 billion.

What are the traits of a successful FX Trader?

Prosperous currency traders share common characteristics such as knowledge, experience and having access to timeous and reliable information.

How can a newcomer replicate the requirements for success in Forex trading?

Knowledge: join a dealer / broker platform that offers quality educational content. It is normally available to registered clients for free to promote learning as the service provider has a vested interest in the client’s ongoing success. The study material is typically accessible online 24/7 and covers topics like the fundamentals of Currency trading, also how to use charts as a powerful tool during the process, which is called technical analysis.

Experience: ensure that the selected platform offers a Demo facility. This is where the broker allows the aspirant speculator to trade in the real FX market, but with play money. The simulation account is credited with artificial funds of say $20,000 or $50,000. The learner then applies the newly acquired knowledge in the live market, but totally risk-free. This is the ideal way to gain good experience beforehand. The Demo can be used for many months, or even years, until the student is confident enough to trade with real money. The training phase is also a good time for the candidate to decide whether Currency trading is for them, or not. If no, then it is a good opportunity to exit the venture without any risk of loss.

Information: in the fast moving Forex market it is vital to have a continuous flow of timeous and reliable information to base trades on. When a Currency broker or dealer platform is selected, care should be taken that it is a reputable organisation with a financial services licence, also a long and solid history.

Are there any retail Forex brokers or dealers based in Singapore?

Yes. There are at least three, reputable and proven global Forex brokers based in Singapore: * IG is a global corporation which is listed on the London Stock Exchange. They are also registered and licenced in Singapore. * Oanda is an international company, headquartered in Canada, also represented in Singapore. * CMC Markets is based in the UK, listed on the London Stock Exchange and also has an office in Singapore.

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