Foreign exchange trading occurs in one of the world’s biggest and most dynamic markets, constantly moving in response to the latest news. The market has transformed over the past few years with internet-based trading and private traders can now get started with a deposit of only a few hundred dollars.
Australia is one of the major forex trading centres which operate around the world to ensure the market is active and liquid 24 hours a day during the working week.
Many brokers provide education for newcomers to forex and allow them to operate a practice account in real time to get an experience of the market without risking any cash. There are also mini accounts, which give beginners the opportunity to trade small contracts.
Some questions to ask in choosing a broker and trading platform include:
– How many years have they been in the market and how wide is their global reach?
– What do they provide in the way of technical support and customer service, is it a 24-hour service and what is the cost?
– What education and training are available?
– Do they offer a demonstration trading account?
– What type of trading platform do they offer? How reliable is it (may be published on their website) and how flexible?
– What tools are provided in the way of technical or fundamental analysis?
– How much do you need to start with and what leverage is offered?
Forex trades are made between parties rather than through a central exchange and brokers make their money on how they manage the spread between the buy and sell prices instead of on commissions. The spread is referred to in “pips” or the difference in bid and offer price. If the Australian/USD is quoted at 0.8636/0.8638 then the spread is two pips.
Each trade is of a currency pair so you are buying one and selling the other in the expectation that one will rise against the other.
It is important to have a trading platform that you can customize to your particular needs. You can find these out by trying a practice account which will give you confidence before going on-line for real.
GFT sales manager Brendan Gunn says that stability of the platform is important as some are combinations of different software or orders go through another system and reliability will depend on how those systems integrate with each other.
He encourages all new clients to start with a demo account. “This is the best way to understand how forex trading works and to familiarize yourself with the software you will be using before opening an account.”
Some brokers offer mini accounts, with smaller deposit and contract values, but Ross Bauer believes demo accounts are a better starting point as beginners can gain experience in real time without risking any of their own cash.
The amount of money you need to get started varies between brokers but can be a few hundred dollars. Leverage also varies but the margin for a $100,000 contract may be $1,000 or one per cent. Leverage enables you to trade with much more than your initial deposit, but also increases your potential losses. The speed of the market and leverage raise the level of risk in forex trading and many experts believe success in forex is about managing risk more than being able to predict currency movements.
There are a number of ways to limit losses and many of the internet-based platforms will automatically start reducing a position once it starts dipping under a set level. Brendan Gunn says traders should enter the market with a stop-loss strategy, setting limits to avoid the temptation of staying in the game longer than planned and risking big losses.
There is the normal stop loss position, where the trader decides their exit point and closes out the trade when it is reached. An alternative is an automated trailing stop. You set the distance from the current quote that you would like your stop to trail and if the market moves in your anticipated direction, the stop order will automatically follow, or trail, the market by that distance. If the market turns against you and moves the distance at which the stop was set to trail, the stop order will be filled.
Automated trailing stops are popular in such fast-moving markets. They help traders manage their losses and capture additional profits because the stop can adjust automatically as the market moves.
The markets are influenced by interest rates and inflation data, changes of government and budgets, to name a few, and a major piece of news over the weekend can make Monday openings very volatile.
Many platforms provide international news and economic data for traders and Ross Bauer says the internet has made it much easier to research and find out what may affect currencies.
Brendan Gunn says successful traders analyse economic information that indicates the strength of a country’s economy and ultimately the value of its currency and the direction in which it is likely to move. “Foreign currency is the fastest and biggest market so the more time you commit each day to monitoring the market and your trades, the better.”