Investing Guides: An introduction to Forex trading

A brief on what Forex trading is all about.

The Foreign Exchange market is a global market for the buying, selling or exchanging of foreign currencies. Due to its high liquidity, it was widely quoted that more than 1.5 trillion USD transaction on a daily basis. As a global decentralised market, the trading of Forex is available around the clock, except for the weekend.

What is Forex trading?

For Forex traders, Forex trading is the simultaneous buying a currency and selling of another currency. The two currencies make up a currency pair which is the exchange rate dependent on each other movement. The base currency is indicated on the left and the quoted currency separated by a / on the right side.

Example: Euro/USD = 1.09245. This means that 1 European dollar is trading for 1.09245 US dollar at the particular trading moment. Due to the high trading volume of Forex, the quoted rate changes on a sec by sec basis.

Traders take advantage of price movement by placing a BUY (Long) position or SELL (Short) position on a currency pair. A BUY position means the trader believes that the base currency will strengthen against the quoted currency and it holds true for the opposite.

While currency pair movement typically moves within a 1-2% margin on daily basis, the trading platform offers leverage option of up to 1:250 to allow traders to achieve higher returns on their trades.

How does a trading platform work?

An individual looking to trade Forex has to open an account with a Forex trading platform. Most of the trading platform allows trading with as low as S$500 deposit. When a trade is placed be it to BUY or SELL, the quoted rate includes a spread which is the difference between spot price. Trading platform earns the spread as remuneration for facilitating the trade. This is regardless of the trader making a profit or loss from the transaction.

Is Forex trading suitable for me?

Understand your trading style and be prepared to spend a lot of time on preparing and gathering data:

  • Fundamental traders consider factors such as country’s inflation, trade balance, gross domestic product, growth in jobs, central bank’s benchmark interest rate when making a trade.
  • Technical Traders consider factors such as price action, movement trend, support and resistance levels when making a trade. Aspiring traders must note that Forex trading requires in-depth technical knowledge, fundamental analysis and discipline to be successful in trading.

Aspiring traders must note that Forex trading requires in-depth technical knowledge, fundamental analysis and discipline to be successful in trading.

Is Forex trading considered Investing?

Investing is commonly accepted as the accumulation of wealth over a long-term horizon. Financial instruments such as Stock and Shares, Bonds, ETFs and Unit Trust FundsILPs are usually used. An investor is usually comfortable with 10% to 15% annual growth in their investment portfolio over a longer period time.

Read alsoEffect of compounding returns on your investment

Read alsoInvesting Basics

Forex trading, on the other hand, is closer to speculation. Positions are held no more than a couple of days and usually closed before the weekend. Traders seek higher returns on their money, but the odds of losing are equal or higher when taking into account spread for every trade you take. Remember that Forex trading is a zero-sum game. Someone has to lose money in order for someone else to make money.

What should I take note of when trading the Forex market?

While a 1% movement of a currency pair does not make a major profit/loss to a trader, Forex trading is usually done with leveraging and profit/loss can end up amplifying its effect significantly. Know that making a profit on a demo account is very different from actual trading with real money at stake.

Successful trading involves knowledge of knowing when to execute a BUY or SELL trade for a currency pair. Stay disciplined enough to take profit to maximise return or stop loss to reduce loss to capital. Experiences are usually accumulated through mistake and new traders must be prepared to undertake losses.

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