Getting started in foreign exchange trading
By Helena Keers | theage.com.au | 11 June
Perhaps you have heard about the booming foreign exchange market. Maybe the rising dollar has made you wonder how you can benefit from our stronger currency. Either way, if you're considering investigating foreign exchange trading at the moment, you're in good company.
The global Forex market has a daily turnover of around $US3.7 trillion and it's no longer just the wealthy individuals who are getting in on the action. The number of smaller DIY traders has also grown. Why? Because now you can open an account with just $350 and make money from volatile markets and currencies. Of course, you've also got to be prepared to lose it.
Forex trading can be fast and exciting, allowing you to benefit from volatile markets in ways that stocks and shares do not. But, just as you can enjoy fat returns, so too can you open yourself up to heftier risks.
Both the advantage and disadvantage to Forex trading is the leverage you can get on your cash. Put simply, this means you can control about 100 to 400 times the amount of money in your account, so whatever you make - or lose - will be multiplied by 100 or 400.
So there's quite a bit of research to do before you jump in. First, you've got to understand that exchange rates change by the hour - sometimes the minute - so Forex trades can last minutes, hours, days or even weeks. It's an unpredictable science and there are few or no guarantees.
Trading basis
Trading Forex means you're buying one currency and selling another in exchange. So you're always trading in pairs. For example, an exchange rate of one Australian dollar to the United States dollar means that $1 is worth the same as $US1.
Forex is quoted on a "bid" and "offer" price system. This means you can buy a currency from a dealer for their "offer" price. If you want to sell a currency the dealer will give you a "bid" price, which is what he is willing to pay for the currency you are selling.
Many Forex providers, or market-makers as they are called in market jargon, will quote you a "spread". This is the difference between the "bid" and "offer" prices quoted by your market-maker.
It's really just like going and getting your currency changed before going on holiday. Your bank quotes you a price and you get your money changed. Then you notice there's a commission on the deal, which is effectively the same as the spread.
Getting started
The first thing you've got to do is open an account with a broker. Picking which one to go for will probably be determined by how much you want to trade and how frequently. The table above, compiled by research house Infochoice, should give you an idea of what the different brokers offer.
For example, if you don't want to risk too much too early, you might want to go for Easy Forex, which offers "mini accounts" where you can make trades as low as $25, rather than the usual $5000. You can open an account with many brokers with $100,000, $25,000, or as little as $350.
You just have to make sure you have enough in your account to satisfy the margin requirements of your broker or dealer: usually more than 25 per cent above the amount you want to trade.
Once you've signed and had a go at the demo accounts (and, by the way, Easy Forex doesn't offer a demo) all you have to do is log on to the internet and you can buy or sell currencies in different markets 24 hours a day (5 1/2 days a week).
What if it goes bad?
Check what sort of safeguards your dealer offers. Most have systems that will warn you when things are starting to go wrong as your balance falls to your buffer, or margin, requirement.
You can put "stop orders" or "limit orders" on your accounts to limit your losses or to protect your profits. But without "guaranteed" stop orders you can be in serious trouble. Let's say you get an email warning you that you're account balance is close to your margin requirement. You call your broker (or he acts without having to wait for your call) but your position can't be closed quickly enough.
If this happens you could lose all your money and even end up owing money to your dealer.
Further reasearch
Before you commit any money, consider signing with a few online firms to get access to their demo accounts. These allow you to make hypothetical trades, so you get an idea of how Forex trading works and what software package you like.
Some firms also have online training packages and training courses. The ASX website has helpful hints on options trading and there are books that can help, including The Complete Idiot's Guide To Foreign Currency Trading.
You should do some homework on currency trading, such as what global factors affect prices.
What rollover?
Rollover comes from the idea that spot Forex is traded, based on a value date of two days after your trade is placed. So theoretically, physical delivery of the currency would be expected in two days. To avoid this, your position is automatically rolled over each day at 3pm. This means that it is closed at the predetermined closing date and reopened at a new opening rate. You can then hold the position overnight, or longer. This is also where interest takes effect: based on the currency pair bought or sold, interest will be automatically added or subtracted from your account.
Source: The Sun-Herald
First published by TheAge.com.au on June 11 2008
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