Every time you go on an overseas trip, you head to the Mustafa money changers to change your SGD into foreign currency. Some Singaporeans decide to take that one step further by forex trading in hopes of making money.
- How does forex trading work as an investment?
- Is forex trading risky? What kind of returns can you get?
- Who is forex trading suitable for?
- Forex trading plan – how do you make one?
- Forex apps, platforms and services
How does forex trading work as an investment?
So, everyone knows that to change money, you just need to head to a bank or money changer. But things are a bit different when you’re forex trading.
Technically, so long as you’re buying and selling currency in order to turn a profit, you’re forex trading. But the most practical way to do so is on an online platform with the help of a licensed broker.
People generally trade forex in currency pairs, such as USD/EUR or USD/SGD. Investors watch the fluctuations in exchange rates between various currency pairs, and jump in when they think there’s a chance to buy low and sell high. Each time you execute a trade, you will have to pay the “spread”, which is the difference between bid and ask prices. However, unlike stock trading, there is generally no other commission.
Compared to, say, buying blue chip stocks, buying and selling forex tends to be a lot more fast-paced, and investors hold on to their currencies for shorter cycles and monitor the market more closely.
Another key difference is that the forex market stays open around the clock. There is no close of the trading day, nor do you have to worry about the trading hours of various time zones. That means you can literally get up and trade currency any time of the day. It also means you can lose money in your sleep.
Is forex trading risky? What kind of returns can you get?
Forex trading is generally regarded as high risk. There are a few reasons for this.
Using leverage means borrowing money from your broker in order to execute trades. This enables you to trade money that you don’t have, in hopes that you’ll make even more money from the trade and be able to repay the broker with your earnings. Forex traders usually use lots of leverage, which means the risk of making big losses is high.
It’s a zero sum game
Unlike the stock market, which in an ideal situation can result in a cycle of overall productivity, forex trading is a zero sum game. That means that for every person who gains, somebody else must lose.
Very high volatility and fast pace
Fluctuations in the forex market are generally much more violent than they are on the stock market. Many of the big forex players use enormous amounts of leverage. That means that you can move from a very strong position to a very weak one within minutes or even seconds. So never trade forex unless you’re able to dedicate your time to frequent monitoring.
Potential for high returns and big losses
Forex involves high risk, but at the same time if you know what you’re doing and luck is on your side, the potential for earning high returns is also there. Thanks to leverage, you can make pretty massive trades so long as you’re willing to take on the risk of making massive losses.
Who is forex trading suitable for?
Clearly, forex trading isn’t for everyone, especially not the faint of heart. If you’re seriously considering it as an investment strategy, you should fulfil the following criteria:
You have a high risk appetite
Forex trading is probably not for you if you’re approaching retirement and should instead be moving your investments into less risky vehicles. It is firmly in the domain of speculation, and therefore very risky.
You can afford to lose money
The learning curve for forex trading is steep, and many investors get their accounts wiped out a few times before they start to make money.
You are able to monitor the markets closely
The huge fluctuations of the forex markets mean that you need to be present to watch the market and have fast fingers in order to trade at the right time. If you’re looking for a “buy and hold” investment strategy, forex is not for you.
Forex trading plan – what is it and how do you make one?
Sure, you could get on that forex trading platform blind and start buying and selling currencies on a whim. But if you want the best chances of actually making money, you need a forex trading plan.
Simply put, a forex trading plan details everything you plan to do when you trade—from your daily to-do list to how you are going to analyse the markets and what steps to take to implement your strategy.
The reason a plan is so important is because trading forex is very fast-paced and will command all your attention. Ideally, you should pre-plan all your steps with the help of your trading plan so that there is no room for stalling or rash, emotional decisions when you are trading.
Here are some things that should be set out in your trading plan:
- How frequently and when you are going to trade.
- What signals must be present when entering the market.
- What signals indicate that you should exit the market.
- At which point you should sell a currency because you have lost enough (stop-loss), or earned enough (take-profit).
- The size of the trades or bets you are going to make.
Forex apps, platforms and services
To get started trading forex, you need to register on a forex app, platform or other service provided by a broker. You’ll then be able to execute trades on the platform using the provider’s interface.
Here are some of the well-known platforms open to Singaporeans:
- Interactive Brokers
- FX365 Mobile
If you’re not which to choose, we can help you find out which is the best investment brokerage for Forex trading.
It is not a must to open an account with a brokerage regulated by MAS. But beware of opening accounts with overseas brokers that do not have an established reputation. Always check the MAS Investor Alert List to make sure it’s not blacklisted.
Just like when you are shopping for any other service, don’t forget to compare fees when shopping for forex brokers. The main thing to compare is transaction costs. As mentioned earlier, the main fees you will be paying each time you transact is the spread—the difference between the bid and ask prices.
Finally, before you start making any real trades, it’s always useful to simulate trades using a demo account.
Have you ever traded forex? Share your tips and tricks in the comments!