In this article you can find a practical and basic guide for beginners to understanding what is the forex market in Australia, how to trade forex, and how to open a forex trading account in 3 steps.
Since the global financial crisis in 2008-2009, investors have come to distrust investing in the equities and turned their attention to playing the “global macro” in terms of currency trading. That fueled the growth of Forex trading around the world, including Australia.
Over the last decade, the Australian financial industry has gone through a remarkable transformation and now it is home to a number of world-class Forex brokers who are serving millions of traders from around the world. According to the Sydney Morning Herald, the Forex trading is a $380 billion industry that has been doubling in size since 2007.
In the last few years, the U.S. Securities and Exchange Commission (SEC) in the United States, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, has imposed some trading restrictions. For example, US-based Forex brokers can only offer up to 50:1 leverage to retail traders. Also, the strict rules for opening a trading account with US-based brokers prompted some of the major brokers to shift their operation offshore.
As the Australian government was providing a highly regulated market that promotes a rather liberal trading environment compared to the United States, a lot of international Forex brokers choose to base their businesses here. In contrast to US brokers, some of the well regulated Australian Forex brokers are offering up to 500:1 leverage! This has further fueled the growth of the Forex industry in Australia.
The Australian Securities and Investments Commission (ASIC) has played a critical role in both liberalizing the FX trading industry and maintaining a high standard in Australia. In order to start a Forex brokerage business in Australia, a company must obtain an Australian Financial Services License (AFSL).
In order to obtain the AFSL, the brokerage company must demonstrate and meet certain strict criteria. For example, they must demonstrate the technical capability to carry out the financial services to general investors as well as prove sufficient financial resources.
Besides that, an Australian regulated Forex broker also has to meet other obligations, including provisions for training the staff, meet regulatory compliance, have standard procedures for dispute resolution, and have adequate insurance to safeguard client funds.
Yes, forex trading is totally legal in Australia. All brokers operating in Australia need to get an ASIC license to become a regulated firm.
Unlike many Forex brokers who are registered in small island nations, where regulatory oversight is limited at best, as a Western democracy, Australian government regulatory authority – the ASIC – provides a safe and legal trading environment for both local and international retail Forex participants.
The high growth momentum in the Forex industry has promoted some of the top forex brokers to start offering cutting edges trading features such as Straight Through Processing (STP) and True ECN. Currently, Australia is home to some of the largest True ECN Forex brokers in the world. In fact, ECN trading even attracted some of the largest institutional traders and money managers to start using Australia based brokers.
In a nutshell, trading Forex means exchanging any currency into another currency.
If you ever visit outside Australia, you would need to convert your Australian Dollars into the local currency of your destination country. For example, if you visit a friend in Auckland, you need to purchase some New Zealand Dollar to buy a gift for your friend.
To do so, you need to hand in your Australian Dollars to a foreign exchange broker/dealer and he or she will hand you the New Zealand Dollar in exchange. The amount of New Zealand Dollar you will receive will depend on the exchange rate of the day.
Now, the price of each currency is set by people and institution buying and selling national currencies in a virtual international marketplace called the foreign exchange (Forex or FX ) market. The Forex market is the largest market by volume in the world. In 2014, the Forex market had an average daily volume of as much as $5.5 trillion!
The sheer volume of trading in the Forex market presents us with a unique opportunity to profit from the currency pairs price movement in the market.
For example, right now (as of April 1, 2020) the rate for each Australian Dollar (AUD) against the New Zealand Dollar (NZD) is 1.1005, which means if you hand in 1 AUD to a foreign exchange dealer, he or she will hand you 1.1000 NZD.
However, this rate can either go up or down over the next few days based on the supply and demand of these two national fiat currencies.
Let’s say the rate of the fx pair AUD/NZD goes down to 1.0000 next week, and you still have few NZD left after your trip ended. Since you cannot pay for coffee in Melbourne with New Zealand Dollar, you need to convert it back to the Australian Dollar.
Since the rate has gone down to 1.0000 from 1.1000, you will receive 1 AUD back for each 1 NZD.
But, remember that initially, you received 1.1 NZD for each AUD.
So, you just made a profit of $0.10 NZD on your way back home!
This is a very simple example of how you can make profits from buying and selling foreign exchange from the comfort of your home.
But wait, mate, we haven’t told you the secret about why Forex trading has become so popular over the last few years…
The broker/dealers offer to trade on margin, which is called leverage. Some of the top Forex brokers in Australia offer 400:1 or even 500:1 leverage! It means you can buy 400 or 500 AUD with a deposit of only 1 AUD! With leverage, a small fluctuation in the price can magnify your profits by 400 times!
So, the 0.10 NZD profit would become 40 NZD if you were trading with a professional broker that offers 400:1 leverage.
All investments involve always a risk. Trading in the Forex market involves significant risks due to leverage. Also, to the sudden market volatility even if the trader’s point of view is correct in the global currency markets.
There are also interest rate risks that affect the exchange rates of countries’ currencies and the risks of a trading investor as it can cost you to lose all your money
However, there are several ways that can be used to avoid or reduce these risks, such as:
When you land in a new country and exchange your dollars for the local currency, you are practically trading Forex. However, as you would have figured out by now, that is not a very practical way to trade in the market with large quantities of funds.
The good news is that as the trading foreign exchange became very popular over the last decade, it has encouraged a large number of online brokers to offer a low-cost solution to trading currencies over the Internet.
In order to access the global foreign exchange market and start trading Forex, the first thing you need to do is open a brokerage account with a Forex broker, who will provide you with the software and connect you to global banks, dealers, and other liquidity providers.
As there are literally thousands of Forex brokers offering their service, it is a rather difficult and time-consuming task to pick the right broker. In order to make it easier for our readers, we have spent significant time researching the best Forex brokers for the Australian traders. You can take a look at our shortlist of top Forex brokers in the top section and pick the right broker.
Opening a Live account is easy and you would only need to provide your personal details, such as verify your address and identify in order to open an account.
Once you select a broker and open a live account, the broker will provide you with an account number and login details to access your brokerage account.
Most modern Forex brokers offer web-based trading platforms. But, professional traders often prefer to install the trading platform (MetaTrader) on their computer for ease of access and reliability.
Depending on the type of trading platform offered by your Forex broker, you would have to enter your personal account number and password to login to your account, either via a web browser or with the provided software.
Most Forex brokers offer knowledge banks that provide details regarding how to operate their trading platform. But, you will find that across all the major trading platforms, trading is done with some basic features and it takes a few minutes to understand the commands.
For example, on the most popular trading platform, MetaTrader 4, you can either place a market order or a pending order with your Forex broker.
With market orders, your order is filled by the broker the market price. With pending orders, you can place a “standing order” with your broker to fill your order either at a higher or lower price compared to the current market price. These two types of orders are known as a STOP order and LIMIT order, respectively.
If you place a buy order and the price goes up, you would make a profit. By contrast, if you place a sell order and the price goes down, you would also make a profit. You can also set a STOP LOSS order to minimize the risks and a TAKE PROFIT order to get out of the market with a profit automatically.
Moreover, all Forex brokers will allow you to modify these “standing orders” at any time during the official trading hours.
We recommend that you open a “demo account” with your Forex broker and play around with the trading platform and familiarize yourself with the trading platform before placing any Live orders