In Australia, forex trading is a popular activity for those who are looking for opportunities in the financial markets. In this article, we will examine some benefits of trading forex to explain its appeal. We will also go through some of the most common risks traders encounter when trading currencies, and how they can mitigate these risks to make the most of their trading opportunities.
Benefits of forex trading
Forex trading in Australia offers traders several benefits, including access to a large and liquid market, flexible trading times, low barriers to entry, and the ability to trade on margin. Below, we explain in detail these benefits.
A large and liquid market
The forex market is the largest and most liquid financial market in the world, with a turnover of over trillions of dollars daily. This high level of liquidity makes it very easy for traders to buy and sell currencies, particularly major ones like the US dollar, the Great Britain pound, the Japanese yen, and the Australian dollar. It also makes it easy for traders to find opportunities in the market for major and most minor currency pairs, as exchange rates are always in flux.
Flexible trading times
The second advantage of forex trading is that it offers traders flexibility when it comes to when they want to trade. The forex market is open to global participants, regardless of where they are located. There are different local sessions – the Sydney session, the Tokyo session, the London session, and the New York session – that open and close based on local times, but anybody is free to participate in any session.
Many traders therefore say that the forex market is open for twenty-four hours a day, five days a week. The market is closed to retail traders on weekends, which is the only time when traders cannot open or close positions. This offers them a large window of time to trade, unlike the stock market, which closes each evening and only reopens in the morning following local time.
Low barriers to entry
There are also relatively low barriers to entry when it comes to forex trading. Many traders can start trading with minimal funds, and it is easy to create an account for free with any major broker. Traders can then access trading platforms for free and start trading with their funds.
Ability to trade on margin
The final main advantage of forex trading is the ability to trade on margin. This means that traders can start trading with a small initial deposit – the margin – in their account, and they can borrow money from their broker to gain greater exposure to the forex market. Trading on margin can potentially help traders make a much more substantial profit if their market predictions are correct.
However, it can also cause catastrophic losses beyond their initial deposit if their predictions are not. Therefore, trading on margin is certainly a double-edged sword. Nevertheless, for many traders, margin trading presents a much greater advantage than the risks it poses.
Risks of forex trading
However, traders should also be aware of the risks involved in forex trading, including currency fluctuations, leverage risk, and economic risks. Below, we explain in detail these risks and how you can mitigate them as a trader.
One of the greatest risks of forex trading is that of currency fluctuations. Currency exchange rates are constantly changing for a myriad of reasons, ranging from political and economic influences to war, public health crises, and changing trade terms. Rapid fluctuations in the wrong direction can lead to losses if a trader is not prepared.
Indeed, there is no way to prevent currency exchange rates from fluctuating or predict where they will go. However, a way to reduce your risk when trading is to always keep an eye on the markets and to set stop-loss orders that can help you close out your positions once an exchange rate hits a certain price.
Another risk of forex trading is that of leverage risk. Forex trading is leveraged, which means traders can open much larger positions than they have the funds to do by borrowing money from their broker. Leveraged trading increases the trader’s exposure to the market, which has the potential to increase one’s profits. However, it also has the potential to substantially increase one’s losses.
One way to minimise leverage risk is to use leverage sparingly and cautiously. This is especially true for novice traders who are just dipping their toes in the forex market. It also goes without saying that having a backup plan is essential. This means having the right risk management strategies in place for every trade, including the use of stop-loss orders.
Political and economic risk
Finally, changes in government policy or economic conditions can have a significant impact on currency exchange rates. This is because each country’s central bank sets their currency rates, and each nation or region’s GDP, inflation and interest rates, and unemployment levels also impact the performance of its currency in the forex market. Countries with poor relationships with neighbouring nations also have an influence on how its currency performs in the forex market, as they damage international trade opportunities.
One way to mitigate your risk when trading forex is to select currencies from stable and flourishing economies. In most cases, this means trading a pair of currencies from the seven major currencies: the US dollar, the Euro, the Great Britain pound, the Japanese yen, the Swiss franc, the Australian dollar, and the Canadian dollar. These countries have developed economies and strong political and monetary policies that keep their currencies relatively stable. This minimises the risk of large and sudden dips in their currency’s valuation.
How to trade forex in Australia
If you are an Australian resident and wish to participate in forex trading, there are plenty of ways you can do so. One of the most popular ways people get started trading forex is through opening an account with a broker. You can also trade directly on online platforms without the help of an intermediary.
Trading forex with a broker
Many people choose to trade forex with a broker, and for good reason. Brokers are often able to offer their clients free educational tools and trading indicators that can help them with technical and fundamental analysis. Brokers may also offer market insights daily, written by their team of financial analysts. This is a great way for traders to learn more about what’s going on in the market and keep tabs on exchange rates.
Trading with a broker can also be a good idea if you want broad exposure to international markets. Depending on the broker, you will have access to a wide range of instruments and financial markets beyond forex, which you can participate in to diversify your portfolio.
When choosing a broker, make sure they have reasonable fee structures that suit your needs and risk appetite, and that they have a license from the ASIC (Australian Securites and Investments Commission), which is the nation’s financial regulatory body.
Trading forex directly on a platform
Another way you can start trading forex is through a forex trading platform, directly. There are many apps and software these days that allow you to access markets without creating an account with an intermediary, such as a bank or a broker. Forex traders can then contact other traders directly and buy and sell currencies.
The benefit of trading directly on a platform is that you reduce brokerage charges, such as commissions and fees you may incur from keeping your positions overnight. This is a great way for intermediate and advanced traders to make the most of their trading and maximise their potential profits.
Forex trading is a very popular activity in Australia due to its potential for substantial profits. Its high liquidity, low barriers to entry, and flexibility in trading times can be appealing to traders who want to take a shot at the financial markets. However, all forms of trading carry risk, and forex trading is no different. When trading, you should be aware of unpredictable fluctuations in the market, and you should also employ the use of leverage thoughtfully. If you want to get started trading forex in Australia, you can do so with an ASIC-licensed broker or through a direct trading platform. Either way, you should make sure never to trade more than you can afford to lose and to keep a close eye on the markets.