Forex trading can be an exciting and fun way to earn an additional income, and many Aussies are now trying their hand at trading online. However, there’s lots to learn before you start trading forex online, and it can be a very risky business.
Savvy can help you find the best online FX broker to get you started trading forex like a pro. Compare minimum deposits, spreads and commissions and find out all you need to know about online forex trading before choosing a broker which best suits your trading needs. Start your trading journey here with Savvy today!
AVA Trade provides comprehensive online forex broking services across more than six global regions, offering exceptional educational content making it highly suitable for novice traders.More details
Vantage is a highly competitively-priced online broker offering traders the opportunity to trade a wide variety of currency pairs and CFDs.More details
eToro connects more than 13 million people through its popular social trading platform that allows novices to copy trade the forex moves of more experienced traders.More details
IG is one of Australia’s largest CFD providers with over 320,000 active trading customers world-wide. It’s award-winning trading platform and low commission rates make it Australia’s #1 online CFD broker.More details
Disclaimer: Savvy is not advising or recommending any particular product to you. We provide general information on products for the purposes of comparison, but your personal situation or goals are not considered here. Although we try to make our comparisons as thorough as possible, we do not have information on all products on the market on our site.
You should always consult a given offer’s PDS or further documentation in the process of deciding on which forex platform to choose, as well as seeking independent, professional advice. If you decide to apply with one of the platforms listed above via our website, you will not be dealing with Savvy; any applications or enquiries will be conducted directly with the platform offering that product.
Forex (short for foreign exchange) or FX trading involves buying one currency and exchanging it for another in order to make a profit. It takes advantage of the price movement in international exchanges to make a profit from buying and selling currencies.
FX trading is one of the most popular forms of trading in Australia, but it can be a risky, and you can end up losing a lot of money. It is also quite complex, and there’s lots to learn. Forex trading is harder to learn than trading straight shares, because it makes use of leverage, which is effectively borrowing money to trade with. The use of leverage magnifies both profits and losses, which is why it is a riskier form of trading than simply buying and selling shares.
Each day foreign currencies go up and down on the international money markets in relation to one another. Forex trading involves investing in one pair of currencies, essentially betting that one will go up in value against the other. If you make a successful choice, you can profit from the change in value you’ve correctly predicted. However, if you get it wrong, you can also lose a lot of money.
Forex trading involves using an online trading platform to buy and sell currency in pairs, one value against the other. On the global markets, all currencies are quoted in pairs, for example AUD/USD. This refers to the value of the Australian dollar (AUD) against the US dollar (USD). All currencies in the world have a three-letter symbol which represents that one currency. Other common pairs include:
FX trading involves initiating a forex trade (called ‘opening a position’) to buy one currency using another. The aim is to benefit from the price change between when you open your position and when you convert the currency back again, called ‘closing a position.’
At no time in FX trading do you actually ‘own’ the currency you ‘buy’ – rather you make a contract with your online broker to buy and sell it, and profit from a change in price between when the purchase and sale happen.
In legal terms, you are buying and selling a forex contract, not the actual currency itself. This is why FX trading is a form of derivative trading. A derivative is a security (a financial ‘product,’ like a contract) whose value is dependent on the value of the underlying asset (ie. the currency on which the contract is based.)
There are several costs to consider when FX trading. These include:
The best forex broker for you will depend on what your FX trading needs are. For instance, are you a novice trader, and so want a broker which offers lots of online assistance and ‘how to’ help? Or, are you further along in your trading career, and are looking for a broker which offers the most extensive and sophisticated charting programs?
Consider all these other factors when making your choice between brokers:
There is a universally accepted way of structuring a currency pair. The value of the base currency (the first currency) is always shown first, against a quote for the second or counter currency. There are three types of currency pairs in forex trading – majors, minors and exotics.
Almost all trading is based on the US dollar, which is the world’s leading reserve currency, and is involved in more than 88% of all FX trades which take place annually worldwide. In total there are more than 128 currency pairs, although only a fraction of these are regularly traded and are suitable for FX trading.
Major currency pairs
The major currency pairs are those traded most often internationally, and all involve the US dollar. These are the most ‘liquid’ pairings, which means they have the highest number of buy and sell orders for that currency, so you’ll never have any trouble finding a buyer if you’re selling a major. The major pairs world-wide are:
EUR/USD: Euro/US dollar
USD/JPY: US dollar/Japanese yen
GBP/USD: British pound/US dollar
USD/CHF: US dollar/Swiss franc
USD/CAD: US dollar/Canadian dollar
AUD/USD: Australian dollar/US dollar
NZD/USD: New Zealand dollar/US dollar
If you are just starting to trade FX, you should consider starting your journey by trading EUR/USD, as this is the most frequently traded pair and the easiest to start with.
Minor currency pairs
Next come those pairings which don’t involve the US dollar. These pairs are less liquid, which means the market for buying and selling them is smaller than for the major pairings. This can mean they move more quickly, behave erratically and have wider spreads than the majors listed above.
EUR/GBP: Euro/British pound
EUR/AUD: Euro/Australian dollar
AUD/NZD: Australian dollar/New Zealand dollar
GBP/JPY: British pound/Japanese yen
CHF/JPY: Swiss franc/Japanese yen
NZD/JPY: New Zealand dollar/Japanese yen
GBP/CAD: British pound/Canadian dollar
CAD/CHF: Canadian dollar/Swiss franc
Exotic currency pairs
These pairs feature currencies from smaller or emerging nations. They are generally less frequently traded, and so are far less liquid than the majors or minors. You will experience wild and erratic price variations with the exotics, wider spreads, and more difficulty selling your positions, so they are best left to professional and highly experienced traders. Some exotics include:
EUR/TRY: Euro/Turkish lira
JPY/NOK: Japanese yen/Norwegian krone
GBP/ZAR: British pound/South African rand
AUD/MXN: Australian dollar/Mexican peso
Trading using leverage means you only have to pay for a percentage of the price of the asset (the currency) you are buying. The amount of leverage the broker will allow you is known as the ‘margin’ on offer, and can range from as little as 3% up to 60% or more. For example:
Using leverage is like using borrowed money to pay for a part of your trade, expecting the profit you make to be larger than the interest you’re charged to borrow that money. Using leverage magnifies both your profits and losses.
Forex trading is complicated and is a risky trading option. Therefore, it’s important to learn about FX trading and understand the risks involved before starting to trade.
Here’s what many of those unfamiliar FX trading words mean:
ASX – the Australian Securities Exchange, Australia’s stock market
BC – base currency, the first currency in a pair
Brokerage fee – a fee you pay to a stock broker or brokerage site each time you use their platform to buy or sell an asset
Bear market – describes a market environment in which the majority of prices are falling
Bull market – an optimistic market in which most prices are rising
Cable – a slang market term for one of the most popular currency pairings ie. GBP/USD currency pair
CC – counter currency, the second currency in a pair
CFDs – a ‘contract for difference’, which is a type of financial product that is bought and sold based on the value of an underlying asset
Cryptocurrency – a form of virtual currency which only exists in the cyber world. Cryptocurrencies can also be traded online in a similar way to standard FX trading
CPI – Consumer Price Index, which reflects the inflation rate of a particular country, and is a very important market indicator in FX trading
Day trading – a trading strategy that involves buying and selling shares in one day, and closing all positions before the end of the trading day
Derivative – a financial product that is based on the underlying value of another asset. CFDs, FX, options and futures are all examples of derivatives
Forex or FX trading – foreign exchange trading, converting one currency to another in order to profit from price changes
Futures contract – a contract to buy or sell an asset at a specified future date for a specified price
Greenback – a FX slang term for the American dollar, based on the colour of American $1 notes
Hedge – an investment strategy designed to offset or reduce your exposure to risk. It is related to the phrase ‘hedging your bets’
Leverage – using borrowed money to invest in assets
Loonie – the slang FX market term for the Canadian dollar (because Canadian dollar coins formerly pictured a loon on them)
OTC – ‘over the counter’ – which describes the global forex market method of operation, where there is no centralised exchange, but rather trades take place directly between two parties
Share trading – buying and selling shares in public companies through a stock exchange
S/R – support/resistance. This describes specific price levels when reading charts using technical analysis. Support is a level below the current price which has previously acted as a low point. Resistance is a chart level above which the price has shown reluctance to climb
SL – Stop loss order – a type of trading order which automatically kicks in at a certain price to prevent catastrophic loss
Sterling – another name for the British pound
Take a Position – this describes the action of opening a trade – you are said to ‘take a position’ when you choose to open a trade
TP – Take profit order – a price order which is set and then executed to take the profit made on a trade
Volatility – a measure of how much the value of a particular asset fluctuates on a regular basis
Supply and demand
Supply and demand refers to the number of buyers and sellers of a particular currency. In all trading situations, if there are more buyers than sellers, the price goes up. If there are more sellers than buyers, the price goes down. This ying/yang tug-of-war between buyers and sellers is the major fundamental driver of the international currency market.
Trading forex takes time to learn, and experience is necessary to become a successful trader. Do plenty of background research, read a wide variety of trading books, and consider attend a FX trading education course before deciding to start trading. When you do begin trading forex, start with just small trades until you gain more experience of how to trade forex successfully.
A stop loss order is an order that should be put in place for every single trade you make. It is a conditional order that is designed to minimise your risk and losses. For example, your stop loss order may in effect say: ‘If my trade goes against me, and I stand to lose $50, end the trade automatically.’ This order will take effect whether you are watching your trades, or are asleep in bed when it happens, and will protect you from a more devastating loss.
Think of trading in the same way as a child first learns football. First, it’s necessary to learn ball-handling skills, like how to kick a ball. This is like learning how to use a trading platform. Next, you have to learn the rules of the game. This means learning how to execute trades, and what different orders mean. Only then should you start to play football. Start small, only trade highly liquid currencies (EUR/USD for example) and don’t try to play ball games before you’ve learnt how to run!
A trading plan is essential if you wish to start trading forex. Your plan should outline how you are going to choose which currency pair to trade, your entry and exit indicators, and your overall method and trading strategy. Trading without a detailed trading plan is akin to driving blindfolded, so it’s vital to have a trading plan and stick to it religiously.