Forex trading is a term that may be very familiar to you but one that may not have been explained in detail. In essence, foreign exchange trading is the buying or selling of currency pairs on the global market. The best-known pair is the USD/JPY, which trades as ‘the Yens’. Forex trading has existed for several years now, and many traders make a full or part-time living from taking positions on this volatile market.
In Australia, many different brokers offer slightly different products and services depending on your level of experience, account size, and risk appetite. It’s possible to take a position with as little as $5 through to several thousand dollars per trade – making forex trading accessible to all.
Forex trading is excellent for those with a high level of disposable income as you can make substantial returns on your initial investment if you know what you’re doing and choose the right broker.
A key feature of forex trading with an Australian broker is that it’s also possible to trade commodities and indices in addition to forex. Meaning there are plenty of trades available throughout the day, with no need for extended breaks like those found on global exchanges such as the NYSE. It makes forex perfect for those who want to work from home or flexible employment (like shift workers). Forex traders typically aim to take 2-5 trades per week. However, this varies depending on experience and risk appetite. You can get more info here.
The first step in trading forex is to pick a broker you can trust. You need to do your research into the Australian forex brokers and choose one which fits your needs, whether that’s low commissions, fast execution time or friendly customer service (or all of these).
With so many currency pairs available, it can be complicated to know where to get started, but there are some great resources, such as this Forex Cheat Sheet from Business Insider. If you’re new, stick with the majors such as EUR/USD, GBP/USD and USD/JPY
Another critical component when trading forex is risk management. If you were to lose 10% in a single trade, it’s unlikely that your position size would give you enough room to make up the loss before hitting preset stop-loss levels on most trading platforms requiring intervention from a human. It can result in unexpected losses and severely reduce profits or even lead to significant losses if not managed correctly. To reduce this risk, remember to use a wide stop-loss of around 200 pips on all new trades and never double your position size after winning the trade.
Money management may seem like an odd thing to discuss regarding forex trading as many inexperienced traders won’t have enough capital to practice money management techniques. However, many brokers offer free hot/cold storage with no minimum balance requirements. Meaning you can deposit $5 and practice risk management and position sizing without actually risking your own money.
As discussed in the introduction, forex is a very different market than stocks and shares and even shares themselves – let alone other markets such as commodities or indices. To trade successfully, you should learn the basics and how specific currency pairs work together. There are some great courses out there that cater specifically for those looking to enter the world of forex trading, such as the Academy of Financial Trading, which AFL superstar Adam Goodes endorse.
By now, you might be thinking about where to go next, but the answer is simple – time frames. Choosing a timeframe is critical for knowing what kind of trading style suits your personality, risk appetite and lifestyle commitments, whether hourly charts, daily or weekly charts. Surprisingly enough, even intraday forex traders open and close trades within a single day. Whichever timeframe you choose, remember to practise on demo accounts until you have found one in line with your expectations before placing actual money trades using an Australian forex broker.