Forex Trading Australia – The Beginner’s Guide

Forex trading is the process of buying and selling currencies like the Australian dollar, British pound, and the Euro. The overarching concept is to make a profit when the price of the currency pair changes. If you’re based in Australia and you’re looking to start trading forex online, there is much to learn before taking the plunge. That’s where we come in – we’re here to take you through everything you need to know before you begin forex trading in Australia.

In this article, we explore the ins and outs of what trading forex in Australia entails. Not only do we explain the key terms and processes involved in currency trading, but we also review the top forex brokers and provide a handy step-by-step on how to trade forex in Australia.

How to Trade Forex in Australia in 3 Quick Steps

Don’t have time to read our guide all of the way through? Below you will find three quick-fire steps to start buying and selling forex right now.

Step 1: How to Pick a Forex Trading Platform in Australia?

If you’re just starting out in the world of online investments, your first port of call will be to pick an Australia forex trading platform. There are many providers that accept Australian residents, so you need to spend some time researching a forex broker that meets your needs. On top of fees, commissions, spreads, tradable currencies, and customer support, you must also explore the broker’s regulatory standing.

To help you along the way, below you will find our picks for the best Australian forex brokers of 2020.

 

Step 2: Learn How the Forex Market Works in Australia

So now that you have chosen an Australian broker to facilitate your online trading needs, we now need to discuss how the forex market actually works. After all, it’s not as simple as opening a brokerage account, buying and selling a few pairs and making money. You will be required to perform technical and fundamental research to help you assess which way the markets are likely to go.

Before we get to that, let’s start with the basics.

What is Forex Trading?

In its most basic form, foreign exchange, forex or simply ‘FX’ is the process of buying and selling currency pairs. The easiest way to think about the process is to look back at when you last travelled overseas. For example, let’s say that you took a trip to New Zealand and paid for a meal with your Australian debit card. Although you paid for the purchase in NZD, the money came from an Australian bank account.

This means that when you check your statement, you will see the real-time forex exchange rate that the bank used to facilitate the transaction in AUD.  Had you made the purchase just a few minutes later, it is all-but-certain that the exchange rate would have been slightly different. These second-by-second pricing movements are what you will be trading when you join an online forex broker.

Confused? Let’s look at a super basic example to help clear the mist.

1. You decide to trade the Australian dollar against the British pound (AUD/GBP) This is known as a minor pair – more on this later.
2. The pair is currently priced at 0.5401
3. You think that the exchange rate is going to increase in the coming hours, meaning that AUD will perform better than GBP.
4. As such, you place a ‘buy’ order at a stake of $1,000
5. It turns out that your prediction was correct, as a few hours later AUD/GBP has increased to 0.5509
6. This represents an increase of 2%, so you decide to exit the position by placing a ‘sell’ order
7. On a total stake of $1,000, your AUD/GBP returned gains of 2% which amounts to $20.

As you can see from the above example, you were required to place a buy order when you opened the position, and then a sell order to close it. This is because you thought that the exchange rate would increase, meaning that the currency on the left (AUD) would outperform the currency on the right (GBP).

Had you thought the opposite, meaning the exchange rate will go down, then you would place a sell order to open the position and a buy order to close it. The above forex trading process was completed at the click of a button. Whether you plan to trade forex via your desktop or mobile device, all you need is an account with a regulated Australian forex broker.

What Regulations are in place for Forex Trading in Australia?

When it comes to the safety of your funds, you’ll be pleased to learn that the forex trading space in Australia operates in a heavily regulated battleground. At the forefront of this is the Australian Securities and Investments Commission (ASIC). In a nutshell, ASIC is responsible for regulating financial institutions in the country. Not only does this include banks, investment houses, mutual funds, hedge funds, and credit unions but online forex brokers, too.

This means that you will benefit from a range of regulatory protections that you might not find in other nations. For example, all ASIC regulated trading platforms are required to keep client funds in segregated bank accounts. In Layman’s terms, this means that the broker cannot use client money to fund its own operations. In theory, this means that were the broker to run into financial difficulties, your money should be protected.

Using an ASIC broker comes with a range of other safeguards that have been installed to protect everyday Australians. This includes:

• KYC (Know Your Customer): The KYC process involves verifying each and every trader that joins the platform. Depending on the broker you choose, this typically involves uploading a copy of your Australian passport/driver’s license, and a proof of address. Crucially, this ensures that the trading platform remains free from crime.
• Auditing: All ASIC regulated brokers will be audited on a regular basis. This can be scheduled or randomly imposed. The regulator will be particularly interested in the broker’s order book, subsequently ensuring that Australians are accustomed to a fair and honest trading arena.
• Risk Warning: Regulated brokers are required to ensure they make the risks of forex trading crystal clear. This is to ensure inexperienced traders recognize that they stand the chance of losing money.
• Leverage Caps: Although ASIC does not place limits on the amount of leverage you can apply as a retail trader, most brokers follow the caps imposed by ESMA. This is a European body that limits retail traders to leverage of 30:1 and 20:1 on major and minor/exotic pairs, respectively.

All in all, as long as you are trading with a regulated forex broker, you should have no concerns on the safety of your funds.

What Risks are Involved with Forex Trading in Australia?

There is no getting away from the fact that most Australian forex traders lose money. This is typical because newbie investors do not spend the required time learning the ins and outs of how the forex space actually works. As we cover in more detail later on, seasoned forex traders will utilize technical and fundamental research tools.

This is with the view of predicting which way a particular forex pair is likely to move. With that being said, the biggest risk that you will face as an Australian forex trader is that of losing money. The good news for you is that there is a range of safeguards that you can use to mitigate these risks. This includes the likes of stop-loss orders, guaranteed stop-loss orders, and trialling stop-loss orders.

An alternative risk that must be considered is that of a brokerage collapse. While we have already discussed the protections that ASIC brokers offer, this isn’t a 100% guarantee on the safety of your funds. Unlike other countries such as the UK, which benefits from the Financial Services Compensation Scheme (FSCS), there is no deposit scheme that protects Australian investors in the event a broker goes bankrupt.

What Currency Pairs can Australian Forex Traders Use?

Most online forex brokers will host dozens of currency pairs. As we briefly noted earlier, each pair will consist of two competing currencies. For example, if you wish to trade the US dollar against the Japanese yen, the pair is represented by USD/JPY.

With that said, currency pairs are typically split into three main categories; majors, minors, and exotics.

Major Pairs

Major forex pairs will always contain the US dollar alongside a ‘strong’ currency. This would include the likes of the Australian dollar, British pound, Canadian dollar, Japanese yen, and the Swiss franc.

As such, major pairs look like the following:

• GBP/USD
• USD/JPY
• AUD/USD
• NZD/USD
• USD/CHF
• EUR/USD

If you’re wondering what the most traded forex pair in the space is, it’s EUR/USD. If you are just starting out in the world of online forex trading, it might be worth sticking with major pairs. This is because majors benefit from the highest spreads, highest liquidity and trading volume, and crucially, the lowest volatility.

Minor Pairs

Minor pairs always contain two strong currencies, but never the USD. In other words, they will consist of the same currencies listed in the section above on majors.

As such, minor pairs look like the following:

• CHF/JPY
• GBP/CAD
• EUR/AUD
• EUR/GBP

Although minor pairs are heavily traded, you will often find that spreads are slightly less competitive than majors. This is also the case with trading volume and volatility levels. Once again, this goes to show just how strong the US dollar is.

Exotic Pairs

Exotic pairs will contain one strong currency and one emerging currency.  Think along the lines of the Argentine peso, Mexican peso, and the Kenyan shilling.

As such, exotic pairs look like the following:

• JPY/NOK
• NZD/HKD
• EUR/SGC
• EUR/TRY

You might want to avoid exotic currency pairs as a newbie investor. They are typically volatile and spreads are often super-wide.

What is Leverage in Forex Trading?

In a nutshell, leverage allows you to trade with more money than you have in your account. While this can amplify your winning trades, it can do the same with losses. The overarching concept is that you will be multiplying your stake by a certain factor. For example, let’s say that you have an account balance of $500.  If you were to apply the leverage of 10x, you would be able to trade with $5,000.

Let’s look at a more elaborate example of how leverage works in forex.

1. You want to place a buy order on AUD/NZD as you are feeling super-confident on the Australian dollar
2. The pair is currently priced at 1.0845
3. You only have $250 in your forex trading account, so you decide to apply leverage of 20x
4. This means that your buy order is actually worth $5,000 ($250 x 20)
5. A couple of hours later, the price of AUD/NZD increases by 1%, so you decide to exit the position and lock-in your gains
6. Ordinarily, 1% on a $250 stake would amount to gains of $2.50. But, your trade had the leverage of 20x applied to it, meaning that you actually made $50 ($2.50 x 20)

As great as leverage can be on a winning forex trade, it is important to remember that things will not always go your way. This means that your losses will be amplified if you have leverage applied. Not only this, but you also stand the chance of being ‘liquidated’.

This is a really important concept to understand before trading forex with leverage, so check out the example below.

1. Sticking with the same example as above, you place a $250 buy order on AUD/NZD with leverage of 20x
2. This means that you are trading with $5,000, taking your ‘margin’ to 5% ($250 of $5,000)
3. If AUD/NZD went down by 5%, the loss would amount to the size of your margin
4. As such, the broker will liquidate your position. This means that the trade is automatically closed, and you lose your $250 margin

The only way that you can avoid being liquidated is if you add more funds to your margin account. In the world of online forex trading, this is known as a ‘margin call’, as the broker will notify you when you are approaching the liquidation trigger point.

What are Pips in Forex Trading?

One of the most important concepts that you need to learn as a newbie forex trader is that of ‘pips’ (point in percentage). In its most basic form, when the exchange rate of a currency pair goes up or down, the movement is calculated by the number of pips. For example, if GBP/USD moves from 1.2200 to 1.2201, this would be a movement of 1 pip.

In the vast majority of cases, currency pairs have four numbers after the final digit. But, a small number of pairs, such as USD/JPY and EUR/JPY, have just two. For example, if USD/JPY moved from 107.83 to 107.84, this would again amount to 1 pip.

Once your forex trade has been placed, your profits and losses will be determined by the number of pips the currency pair has moved by, in relation to the price that you took. This would then need to be multiplied by the amount you staked ‘per pip’.

Let’s look at a quick example to clear the mist:

• You decide to trade GBP/USD by placing a buy order
• The ‘buy’ price of the pair is 1.2200, and you stake the equivalent of $10 per pip
• By the end of the trading day, GBP/USD closes at 1.2275
• This works out at 75 pips higher than the price you opened the trade at
• As you staked $10 per pip, your total profit would amount to $750 (10$ x 75 pips)

Pips are also important to identify the competitive of the spread. For those unaware, this is the difference between the buy and sell price of a forex pair. The gap between the two prices is how the Australian forex broker ensures it always makes money.

For example, if the ‘buy’ price of AUD/NZD 1.0845, and the ‘sell’ price was 10.847, this would amount to a spread of 2 pips. So, irrespective of whether you place a buy or sell order, as soon as the position goes live you will be 2 pips in the red. In other words, you need to make gains of at least 2 pips just to break even.

This is why we suggest sticking with Australia forex trading platforms that offer tight spreads. In fact, you should be aiming for spreads of below 1 pip on major pairs like EUR/USD and GBP/USD.

Step 3: How to Learn Forex Trading Strategies

As we have mentioned throughout our guide, seasoned investors will always employ forex trading strategies to ensure that have an entry and exit plan on each order they place. There is no hard and fast rule as to which forex strategy works best, as it all depends on you.

To give you an idea of some of the most commonly utilized forex trading strategies implemented by Australians, check out the list below:

Swing Trading

Swing trading is a forex strategy that seeks to keep a position open for a number of days or weeks. The main concept is that you will be looking to capitalize on a trend on a medium-term basis. Let’s take GBP/USD as a prime example. When the UK population voted to leave the European Union in 2016, the British point went on a downward trajectory. A shrewd forex swing trader would have capitalized on this by placing a sell order on GBP/USD. In fact, they likely would have kept the position open until it looked like a trend reversal was imminent.

Scalping

Scalping is the complete opposite to swing trading, insofar that the investor will look to make ultra-small, but frequent profits. They do this by opening and closing dozens, if not hundreds of individual forex trades throughout the day. The scalper will look to pounce when a short-term consolidation period occurs over a number of days. This is where a currency pair trades within a tight range.

Day Trading

As the name suggests, day trading refers to a forex strategy that will see the investor buy and sell currency pairs throughout the day. In other words, the trader will rarely keep a position open overnight. Instead, they will look to make small percentage gains, with positions staying open for a number of minutes or hours. Day traders typically engage with the forex markets on a full-time basis, as it requires in-depth technical and fundamental research.

The forex trading strategies that you decide to employ will ultimately depend on how much time you are able to commit to it, as well as your appetite for risk.

Step 4: Open a Forex Trade

Now that you understand the process a little better, you can open an FX trade at a broker of your choosing.

The account registration and execution process should be straightforward.

Pros and Cons of Forex Trading

Conclusion

While the vast bulk of the trillions of dollars worth of currencies change hands each and every day is dominated by large-scale financial institutions, the retail trading space is getting bigger and bigger in Australia. As a result, there are lots of Australian forex trading platforms that allow you to get started in a matter of minutes.

The most important take-away from this guide is that you must understand the risks of trading forex online. Sure, some traders make a full-time living from buying and selling currency pairs, but most don’t.

References

To ensure we bring you the most reliable and accurate information possible, our writers use primary sources to support their content. These include studies, government resources and commentary from industry experts.

• Moneysmart.gov.au. “Forex Trading, https://moneysmart.gov.au/investment-warnings/forex-trading“, Accessed June 3, 2020.
• Reserve Bank of Australia. “Electronic Trading and the Australian Foreign Exchange Market, https://www.rba.gov.au/publications/bulletin/2011/jun/6.html“, Accessed June 3, 2020.

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