Foreign Currency Trading In Australia Basics
Globally, the most traded market is foreign exchange. It’s no surprise therefore that foreign currency trading popularity has grown within Australia over the past decade. There are elements though that a trader needs to understand prior to trading which are discussed below.
1) Determine Your Leverage Level
All retail currency traders use leverage when forex trading. Forex brokers differ on the maximum leverage available which can then be pre-set by the forex trading platform selected. Leverage increases a forex traders exposure to currency markets which is required since on average currency pairings move by fractions of a percent. Below shows example leverage levels and the purchasing power a deposit of $100 can lead to.
In the final foreign currency trading scenario with a leverage of 500:1, the $100 deposit (capital investment) leads to a purchasing power of $50,000. A movement of just 0.1% in a currency pairing would lead to a profit or loss of $50 (50%). With such an amplified exposure, its critical to find the right leverage level that matches your risk appetite and foreign exchange experience.
2) Understand The Risk Management Tools Available
When currency trading with leverage, risk management tools can be critical to avoid losing the entire deposit or even go into a negative balance scenario. The most common tools are:
a) Stop Loss & Stop Profit Orders
All tools have the option to set a maximum a trader would like to lose or gain on a single trade. Rather than trying to work out the currency pairing levels required, the trader just needs to select the profit/loss amount.
A mistake when foreign currency trading though is that the trader may feel stop loss orders are ‘fool-proof’. This isn’t the case as in volatile markets, losses may exceed the stop loss order due to slippage. This is when the forex broker can’t execute an order at a set price due to thin trading or the market moving too fast to execute the order. Market events from rate decisions to announcements lead to markets where these events occur. Only a guaranteed stop loss order discussed below can stop this.
b) Guaranteed Stop Loss Orders
These stop loss orders guarantee a profit and or loss amount. This means that slippage can’t occur in any market environment and if a forex broker can’t fulfil a trade at a set price, that they will wear the costs. This dramatically reduces the risk factor for a forex trader, especially when trading with high leverage.
The downside with guaranteed spreads is that most forex brokers charge additional commissions or increase the spreads. Only a limited number of forex trading platforms offer this feature (as do forex brokers) so it’s worth considering when comparing forex brokers online.
c) Deal Cancellation
This is a relatively new feature offered only by EasyMarkets. This feature allows forex trading where a deal can be reversed within an hour. This means that when activated, when a forex pairing moves in the wrong direction the deal can be cancelled.
Again, just like guaranteed stops, there can be additional fees associated with enabling this feature so it’s worth balancing these before regularly using this feature.
3) Compare The Forex Trading Platform Offered By Forex Brokers
There are countless forex trading platforms which can be broadly grouped into two categories.
i) Enterprise Foreign Currency Trading Platforms
These forex trading platforms are offered by a plethora of Australian forex brokers (and overseas fx brokers). Their popularity is based on availability and features from usability to fast execution speeds. The two most popular forex trading platforms are:
1) MetaTrader 4
MetaTrader 4 has a user-friendly interface with rich functionality. It’s two core strengths are ‘Expert Advisors’ which allows for automated trading and fast execution speeds through servers in New York.
The key advantage of MetaTrader 4 is that traders who adopt the forex platform can easily switch between forex brokers as the most offered currency trading platform.
The cTrader forex trading platform like MetaTrader 4 is user friendly but has improving charting which can be detached when trading. Order management also make it easier to make multiple traders in turbulent markets.
ii) Propriety Foreign Currency Trading Platforms
There platforms are offered exclusively by individual forex brokers offering unique features. Example include EasyMarkets who platform includes ‘Deal Cancellation’ discussions above while IG offers share and other trading on the same platform. These platforms can have strong advantages but a forex trader is locked into the forex broker unless they are willing to learn a new fx platform at a later date (which can be difficult).