Your complete How-To guide to trading forex
Foreign exchange investment, or forex trading, is not quite as foreign a concept as one would expect. Even a new investor would already have had some experience trading in foreign currencies.
Whenever someone travels overseas to places like Japan for example, they would exchange their Singapore dollars for Japanese Yen in order to pay for their accommodation and travel. Exchanging one currency for another, as in the example above, is a simple form of forex trading.
Forex trading has also served investors well over the years for those willing to do additional research. The foreign exchange market is one of the most liquid markets around with over $5 trillion daily trading volume recorded in recent years. The foreign exchange market comprises many market participants ranging from hedge fund investors, business enterprises and retail currency traders.
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Types of products for forex trading
The most common form of currency trading would be buying foreign currency at the money changer. An investor who would like to buy AUD can approach any licensed money changer in Singapore and exchange their SGD at the prevailing exchange rate, which as at 11 April 2017 stands at 0.9488. This means for every S$1,000, they will expect to receive A$948.80. Similarly, the investor can open a foreign currency bank account and deposit the SGD equivalent amount that would be needed to purchase their desired amount of AUD.
Global developments can cause currency prices to fluctuate on a day to day basis. For this type of trading, investors would have to put in a smaller capital as margin to trade a large currency, usually at a standard of 100,000 units. Investors would be offered leverage usually at a ratio of of about 50:1 where only S$2,000 margin deposit is required. Assuming an investor bought USD at a rate of 1.4001, they would stand to gain about S$64 should the USD/SGD rate rises to 1.4010 for an effective 6% gain.
Futures contracts on currency pairs are also available for inevestors who prefer to get the bid and ask prices through an exchange like the Singapore Exchange.. For these types of instruments, there are fixed expiry months just like any other futures contracts. Option contracts on forex are also available on the market for retail investors.
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Top down strategy for forex trading
For effective forex trading, it is also important to note a couple of well-known and well-used strategies: technical and fundamental analysis.
Technical analysis entails predicting price patterns via price and volume charts and using technical indicators such as moving averages, Bollinger bands and chart patterns. Technical analysis is usually employed by day traders who attempt to predict price trends via interpreting price signals. Basics of technical analysis is rather easy to pick up and is quickly gaining popularity amongst regular investors.
Investors may also employ fundamental analysis to predict future currency price trends. These investors derive their fundamental insights via making in-depth research in economics and trade figures for each country and attempt to forecast future currency price trends via analysis of fundamental or economic dat.
Retail investors can employ a fundamental strategy by analyzing central bank actions. The most obvious example is the exchange rate between the USD and SGD. Since mid-2014, strong employment in the United Stated prompted the Federal Reserve to raise the prospect of interest rate hikes.
From mid 2014 to the start of 2016, the USD strengthened against SGD and the exchange rate rose from 1.25 to a high of 1.4.Investors who had diversified their dollars from SGD to USD would have reaped a return of 12% over the course of 18 months. That is a very good return in comparison to other asset classes, particularly when such trades are typically traded on leverage.
Investors could be rewarded handsomely by taking a mid to long term approach to currency trading as well, through the study of the fundamentals of a country via trade statistics which are readily available online.
Order types for forex trading
Investors should also know the types or orders that one can place for forex trading in order to protect their capital from excessive losses, and take profit on a profitable position.
The common order for investors is the market order. If the ask price for USD/SGD is at 1.4, investor placing a market order to buy would have his order filled at the rate of 1.4.
Another form of order is limit order. If the current ask price for USD/SGD is 1.4, you can opt to key in a buy limit order at 1.39 and your trade will only be filled at 1.39. It is a conditional order where you can specify the price (condition) you want your order to be filled.
If you already have an existing position, it is important to use profit taking orders or stop loss orders. For example, if you had bought USD at the rate of 1.4 against SGD, you can specify to close your position by setting a sell limit order at exchange rate of 1.41 which essentially closes your position for a profit spread of 0.01.
Similarly, you can set a sell stop order at 1.39 where your position will be closed at 1.39 for a loss limit of 0.01. Retail investors may not have the luxury of monitoring their trades on a 24/7 basis, hence it is important to plan your trades and key in your orders accordingly in advance.
Some trading platforms, including those offered by Phillip Futures, have slightly more advanced order types that enable you to manage orders while you sleep or while you are at work. This ensures that you do not have to keep your eyes peeled at the trading screen round the clock.
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Practice makes perfect for forex trading
Practice is key to mastering any form of trading. It is highly advisable to practice using a demo account Many established brokers offer demo platforms which mirror live market prices. This enables you to learn how to trade in a highly realistic simulated environment. Hence, sufficient practice ensures that you are much more confident of trading, while managing your risk, before you begin trading on a live account.
As with other forms of trading, investing in forex may lead to losses to investors. The best approach would be to allocate a small proportion of total investable funds – money that one is comfortable losing – into forex trading.
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Need more help?
If the prospect of forex trading still sounds daunting, seek advice from reputable forex brokers like Phillip Futures.
This is especially pertinent as forex trades involve leverage and are classified as Specified Investment Products (SIP). Under the current regulatory framework, retail investors need to be assessed through a customer knowledge assessment (CKA) and a customer account review (CAR) to determine if they are suitable to trade in these products.
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