Trading the foreign exchange market is a tough gig, but those who learn the art of trading the biggest and most unruly market in the world can reap big rewards. However be warned – the volatility and leverage involved in trading foreign exchange can make for a wild ride.
Kunal Sharma, managing director of Melbourne-based Forex Capital Trading (ForexCT) recounts a month in the life of one of his clients. Just recently he made USD 175,000 in 10 days, says Sharma. A week later he lost USD 115,000 in four hours.
Possibly due to the thrill of the chase, forex trading is booming and forex companies are experiencing unprecedeted popularity.
Last year, turnover in the global foreign exchange market jumped 71 per cent to $3.2 trillion.
According to Katarina Amann of Capital Market Services (CMS Forex) forex hunters are keen to diversify away from equities in these uncertain times.
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Unprecedented movements in the AUD/USD is also bringing new traders into the game, driven in part by the unwinding of the “carry trade” – when traders buy a high interest rate currency and sell a lower interest rate currency. The AUD/USD has fallen from USD 96 cents to USD 68 cents over the past few months – generating fat profits for forex traders on the right side of the trade.
“Traders are drawn to forex due to the 24/7 open market, the low number of currency pairs (relative to equities), and the ability to make trading decisions from global macro-economic events and technical analysis,” says Amann.
ForexCT’s Sharma has witnessed a 30 per cent growth in trade volumes over the last month. But according to Sharma, ‘we ain’t seen nothing yet’.
“The boom we’re witnessing now will be nothing compared to what we’ll experience in five years when current retail forex trading bans are lifted in China and India – and when the Yuan, Rupee, and Ruble are in free-float,” he says.
In a move to capitalise on Australia’s growing forex trading volumes, big international companies of the likes of Forex Capital Markets (FXCM) have set up locally. Other players catering to the Aussie forex trader include Global Forex Trading (GFT), Easy-Forex as well as CFD specialists such as IG Markets.
According to Sharma, forex appeals to traditional investors looking to diverisify away from equities, as well as adventurous, younger players.
Sharma says 98 per cent of his clients are male and many are day traders. But whether they’re on the rich list, cashed-up high net-worth clients or housewives trading in $8 lots, he says everybody likes the idea they can do it themselves.
Some traders place up to 10 trades daily, says Sharma, but the majority trade once a week or even less regularly. The AUD/USD and Euro/USD are the most popular currency pairs.
Most traders prefer to work on a 1 to 100 margin leverage – which would give an investor leverage of $2,500 for a $25 trade, or $1 million leverage for a $10,000 trade. In other words, every time there’s a 1 per cent currency movement a trader doubles their money. But based on a 1 to 300 margin, an investor could control $1 million of leverage on as little as $3,000.
If you get the direction right, forex trading can bring in the big bucks. Had an investor sold the AUD/USD with a $1 million contract with a leverage of 1 to 100 (ie $10,000) on 21 July at USD 98 cents – they would have made a net profit of USD 300,000 on 14 October.
But these sorts of returns are few are far between. Trading forex is a difficult game with many more traders losing money than making money on it.
Therefore, if you’d like to try your hand on the currency market, get educated, start in small lots, and most importantly, apply strategies to protect your funds at all times.