Most people are familiar with investing, especially in properties and stocks. But not many have heard about Forex trading. The idea of Forex trading as a living is even more absurd. However, there are many people out there who are doing Forex trading for a living. Yes, trading as a full-time career because it is lucrative! If you are thinking about venturing into Forex trading, here is our beginners’ guide for you. It has everything on the essential things you need to know about Forex trading before getting started.
What is retail forex trading?
In simple terms, retail forex trading is a game of predicting global currency movement and profiting from it.
How does it work?
It’s a bit like the way you exchange your SGD for another currency according to the exchange rate quoted by the money changers but the fundamental difference is that you do not own the currency you trade.
- Say you place an electronic order with your forex broker for 1000 US Dollars when the exchange rate is S$1.50 to 1 USD. You will need to pay S$1500.
- When the SGD weakens to S$1.60 against USD, you can sell your USD for a profit of S$0.10 per unit of USD you have bought i.e 1000, so you net a profit of S$100.
- Suppose the rate goes the other way and you sell at S$1.40, you will record a loss of S$100.
How do I sign up for an account?
- First things first, find the right broker for you. And here are some guidelines:
- The Monetary Authority of Singapore (MAS)’s website contains a list of licensed forex brokers in Singapore, and we recommend you choose a broker from there for your own safety.
- You will also need to make a minimum deposit, usually S$100 to get started.
- But don’t rush to start trading! Most top brokers offer a demo account where you can get a hands-on experience of how forex trading works but with virtual money.
- You are given a sum like S$50,000 and you can buy and sell at live prices without worrying about losing money. Once you get the hang of things, you can start trading with real money.
How much money do I need to start trading in forex?
Technically, you can start off with S$100 and try out a micro lot. As you get more confident, you can increase your investment.
Full-time traders typically invest between S$10,000 to S$50,000 but this is only after a well thought out risk strategy is in place. At no point in your investment should you put up a figure that would mean a huge dent in your savings.
What are the important things I should know?
A currency pair
Forex trading involves trading currencies in pairs, which are also known as currency pairs. There are many different types of currency pairs in the market, from popular ones like EUR/USD to more obscure ones like USD/ZAR.
Anatomy of a currency pair
One thing you need to know before embarking on any form of Forex trading is to understand what it means to buy and sell each currency pair. A currency pair is quoted in a base/quote currency format in the Forex market. Let’s take USD/JPY for example. In this currency pair (USD/JPY), USD is the base currency while JPY is the quote currency. The price of USD/JPY means the amount of JPY you can get in return for US$1. If we take an example closer to home like SGD/MYR, the price of SGD/MYR reflects how much MYR you can get for S$1.
What actually happens when a currency pair moves?
There are four ways in which a currency pair can move, i.e. the base currency and quote currency can either strengthen or weaken. For example, the base currency strengthening will give the same price effect on the currency pair as the base currency quote currency weakening.
Most beginners are confused about the price effect when the base or quote currency strengthens/weakens. One way to understand it is by visualizing the price movement as a seesaw movement. When the base currency strengthens, it means that the currency on the left is getting “heavier”. This will cause the right side of the seesaw to tilt upwards, which means that this will have a positive effect on the price of the currency pair. Logically, when the base currency strengthens, it means that every dollar of the base currency is now worth more dollars of the quote currency.
What is a pip?
Short for ‘point in percentage’, a pip is the unit used to measure change in a currency pair in the forex market. It usually equals to $0.0001 for currency paired with US Dollar and is also known as one basic point. In some cases (like JPY-related currency pairs), a pip refers to the second decimal place of the price of a currency pair.
Suppose you have a SGD/USD quote of 0.7500, which means for 1 SGD, you can buy 0.7500 USD. If the quote changes by one pip, i.e to 0.7501, it gives you more USD for your SGD.
Doesn’t seem like much to you? This is a volume game, remember? With investors trading in millions, the change of one pip can make a world of difference.
Buying and selling a currency pair
Just like in stocks, you can also take long (buy) and short (sell) positions. Because of the currency pair nature of Forex trading, it gets a bit more complicated.
When you buy a currency pair, it means that you are anticipating that either the base currency will strengthen, quote currency will weaken or both. When you sell a currency pair, it means that you foresee that either the base currency will weaken, quote currency will strengthen or both.
What are the fees you need to pay in Forex trading?
While Forex trading also requires you to go through a broker, it does not necessarily mean that you need to pay a fixed commission fee. However, brokers do charge a fee based on the spread and the volume that you are trading on the currency pair.
The spread is the difference between the price at which the forex broker buys the currency (bid) and the price at which he sells it to someone (ask). The price is like a brokerage fee and is denoted in pips.
How to minimize spread?
In the world of forex trading, the spread is the inevitable trading cost. But there are a few smart hacks to ensure you keep this expense to the minimum.
- You might be tempted to bid for a USD/HKD pair over the traditional ones since you have a chance to make a bigger killing thanks to its bigger swings. But you should know that since such exotic pairings are rare, you will end up paying two to three times more spread than what you would pay for a high liquidity pairing like USD/EURO. The more a pair is traded, the lesser the spread tends to be.
- Believe it or not, there is an optimum time for each currency pairing that could help you reduce your spread. No, it has nothing to do with astrology (even if your friendly neighbourhood astrologer says so). For example, if you plan to trade the EUR/USD, you should do it ideally between 1300 to 1500 GMT. Since there is a lot of volume being traded at this time, traders are at their competitive best when it comes to charging the spread.
Leveraged trading is a double-edged sword
Because of the relatively small price movement of Forex currency pairs compared to stocks, Forex traders typically take advantage of leverage trading to increase their returns. The idea of leveraged trading is simple.
Firstly, you need to decide how much leverage you want to take on. This will be dependent on your own risk tolerance. In Singapore, the brokers are regulated to offer a maximum leverage of 50:1.
A 50:1 leverage means that for every S$100 that you have, you can trade S$5,000 worth of currency pairs. This will increase your returns by 50 times. However, it also means that you can lose your money 50 times faster.
If you’re new to investing and want to learn more, check out our other articles here.