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Forex is a common abbreviation for foreign exchange, and forex traders buy and sell global currencies on the foreign exchange market. The primary objective of forex trading is to make a profit by exchanging one currency for another at an agreed price, for example exchanging Australian dollars for US dollars.
According to a Bank for International Settlements (BIS) survey in 2019, the market has a global estimated trade of $2.4 quadrillion – or $2,409 trillion a year.
The foreign exchange market is where currency is traded.
In a globalised world, trading currency is vital as it enables purchases of goods and services abroad as international currencies need to be traded in order for business to be conducted.
Every day, foreign currencies go up and down relative to one another and traders profit from these changes in movements.
The forex market runs 24 hours a day.
Spreads start from 0.0 on major currency pairs and you get some of the lowest forex trading fees in Australia.
Disclaimer: Trading CFDs and forex on leverage is high risk and losses could exceed your deposits.
Forex traders aim to profit from the change in value of one currency against another. Their trading decisions are based on which way they think forex prices will fluctuate in the future.
A common way to trade forex is through contracts, such as futures contracts or CFDs (contracts for difference). Rather than buying and holding foreign currency, the trader enters into an arrangement with a broker to profit off any change in the exchange rate between two currencies. Of course, if the exchange rate between the two currencies doesn't move in their favour, the trader stands to lose money as well.
On the global forex market, all currencies are quoted in pairs. For example, AUD/USD, GBP/EUR and USD/GBP are just a few common pairs. When a trader initiates a forex trade (or "opens a position"), it's as though they are buying one currency and selling another at the same time. If the value of one of the currencies moves against the other, the trader "closes out" their position, selling the other currency and buying back the original currency they sold.
Say you opened a position with a broker that saw you simultaneously buy Australian dollars and sell US dollars. If the Aussie dollar strengthens against the US dollar over the coming days or weeks, you would then seek to close out your position by trading your US dollars for Aussie dollars – getting more Aussie dollars back than you originally sold. That's how a profit is realised on forex trades.
Of course, it's important to remember that at no stage during the above transaction do you actually own or take delivery of the currencies involved in the trade. That's why forex traded in this way is considered a derivative instrument. Its value is based on an underlying asset, without that asset ever being physically exchanged between the parties.
Forex trades of the type above are typically leveraged, meaning you only contribute a small stake towards the total value of the trade. Most currency contracts are large. The minimum amount you can trade is typically 1,000 units (for example, $1,000). That's because currency exchange rates only fluctuate by small amounts – usually by tenths or hundredths of a cent. So to realise any significant profit or loss, you need to trade at high volumes. Leveraged trading (or trading on margin) allows you to take out a small stake in a much larger trade, with your broker typically making up the shortfall.
If the exchange rate moves in your favour, you stand to profit off the full amount that was traded, not just your small stake. Of course, it works in the opposite direction as well, so if the exchange rate moves against you, you are liable for the losses incurred off the full value of the trade.
That's why forex trading is typically considered to suit more experienced and less risk-averse traders. These days, the trading platforms offered by forex brokers are relatively sophisticated and come with a range of features and tools designed to help traders get the most out of their trades.
Forex trading has many advantages for the right trader, starting with the fact that forex markets are highly accessible. Many are open 24 hours a day. Unlike the Australian Stock Exchange, for example, which only offers normal trading between 10am and 4pm on business days, the global forex market runs around the clock (but not on weekends).
This means foreign exchange prices are constantly going up and down and there are plenty of opportunities for traders. In addition, because forex is a leveraged product, individuals can trade on the market for a smaller initial outlay. In order to place a trade, you only need to spend a small percentage of the full value of your position, which means there is a much higher potential for profit from a small initial outlay than in some other forms of trading. Unfortunately, this also means there is a greater risk of suffering a loss.
Graham is a veteran investor and chooses to trade in forex as a CFD. Believing that the US dollar will likely increase in value against the euro, Graham enters a contract with his broker to trade $100,000 worth of US dollars at €0.90 per US$1. His forex contract at the time of purchase is worth €90,000. Because his forex trading platform allows him to place trades at a margin of 1%, this investment costs Graham $1,000 to place.
Graham’s prediction is correct and the US dollar rises to €0.925, resulting in a profit of around $3,500 for Graham, less any transaction fees.
Forex is certainly a risker asset class to invest in and may favour more experienced investors.
With that being said, forex is like any other investment type and may seem more complex or intimidating for beginner traders than it actually is.
The concept itself is relatively simple.
After all, it is simply trading one currency against another with an investor profiting from the moves in currency.
The forex market has also seen a spike in popularity with retail investors since opening up to them, meaning there are more beginner resources available now than ever.
There are several forex trading services available to Australian traders.
Compare the best forex brokers in Australia below to find one that meets your trading level and needs.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
Important: Share trading can be financially risky and the value of your investment can go down as well as up. Standard brokerage is the cost to purchase $1,000 or less of equities without any qualifications or special eligibility. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Before deciding on the right trading platform for you, make sure to compare the fees and benefits of several providers.
Just like trading regular shares through an online broker or broking platform, you need to make yourself fully aware of the fees and charges that apply before you begin trading forex. To start with, compare the margin you will be required to meet in order to make a trade with a range of providers. This could be 0.5%, 1% or some other figure, and this will affect the amount of money you will have to spend to open a forex position. For example, if your account has a margin of 1%, a trade worth $100,000 will require you to spend $1,000.
In addition, some providers charge a commission for every trade you make. These fees will generally be quite low, such as a few cents per thousand dollars. However, some providers will not charge any commissions on your trades. Other fees may apply to credit and debit card payments.
Finally, you will also need to consider the spread, which is the difference between the buy and sell prices for each currency pair and is effectively what a broking platform will charge you to make a trade. Look for a trading platform that offers tight spreads to minimise the cost involved.
A currency pair is always structured in the same way, following a universally accepted ranking order and always showing the value of a base currency (the first) being traded against a quote (the second) currency.
There are 3 types of currency pairs that you need to be aware of: majors, minors and exotics.
The major currency pairs are considered any market that features the US dollar. The majors are the most frequently traded currency pairs and are therefore the most liquid forex markets to trade.
As a forex trader, this liquidity means that the majors feature relatively stable prices and the lowest spreads – or brokerage costs – when taking a position in any of these currency pairs.
| Major currency pairs: | |
|---|---|
| EUR/USD | Euro/US dollar |
| USD/JPY | US dollar/Japanese yen |
| GBP/USD | British pound/US dollar |
| USD/CHF | US dollar/Swiss franc |
| USD/CAD | US dollar/Canadian dollar |
| AUD/USD | Australian dollar/US dollar |
| NZD/USD | New Zealand dollar/US dollar |
The US dollar is the world’s leading reserve currency and is involved in about 88% of currency trades globally. The EUR/USD currency pair is the most heavily traded and therefore the most liquid currency pair in the world. If you’re going to open a forex trading account, this is the pair to start trading first.
If a currency pair doesn’t feature the US dollar, it's considered to be a minor currency pair. The minors are sometimes called currency crosses because the market means you’re no longer required to first go through US dollars, as was once the case.
The minors aren’t as liquid as the majors, meaning they move more erratically and have wider spreads displayed on your forex trading account.
| Minor currency pairs: | |
|---|---|
| EUR/GBP | Euro/British pound |
| EUR/AUD | Euro/Australian dollar |
| AUD/NZD | Australian dollar/New Zealand dollar |
| GBP/JPY | British pound/Japanese yen |
| CHF/JPY | Swiss franc/Japanese yen |
| NZD/JPY | New Zealand dollar/Japanese yen |
| GBP/CAD | British pound/Canadian dollar |
The most widely traded minor currency pairs consist of pairs in which the individual currencies are also majors. Some of the more popular minors are EUR/GBP, GBP/JPY and AUD/NZD.
The final type of currency pair is known as an exotic. The exotics are essentially minors that feature currencies of emerging market economies.
The nature of emerging markets is that they’re less stable and much more illiquid as a result. This means that when it comes to trading exotic currency pairs, you’ll experience wild price swings and much wider spreads.
| Exotic currency pairs: | |
|---|---|
| EUR/TRY | Euro/Turkish lira |
| USD/HKD | US dollar/Hong Kong dollar |
| JPY/NOK | Japanese yen/Norwegian krone |
| NZD/SGD | New Zealand dollar/Singapore dollar |
| GBP/ZAR | British pound/South African rand |
| AUD/MXN | Australian dollar/Mexican peso |
Keep in mind that the wide spreads mean you may not see your trade executed at the price you expect. When you’re trading exotics, you need to make sure you know what you’re doing and manage your risk accordingly.
Picking the right currency pairs to trade on your account depends on your experience as a forex trader. If you’re new to the game, it’s best to stick with the major and minor pairs. This is because the markets are much more stable and you’ll get lower spreads. Exotic pairs are more difficult to work with because they’re much more erratic and their low liquidity means you’ll see higher spreads.
Whichever currency pairs you decide to trade, make sure you’re managing your risk. It’s imperative to understand that while the opportunity for moves may be larger in the exotics, this also means that your risks are amplified if the market moves against you.
Most forex trading platforms will typically allow you to apply for an account within minutes online. While the application process varies between providers, you will usually have to fill out an online application and then await a response from the provider to learn whether your application has been approved.
You will usually have to supply the following:
Just like any other form of investment, there are several strategies you can consider when trading forex, ranging from the basic through to quite complex approaches. One strategy traders can use is to perform technical analysis or fundamental analysis to try and accurately predict the future performance of currency pairs.
Another common strategy is known as the day trading strategy, and it is based on the simple premise that you do not hold any forex positions overnight. Because the longer you hold open a position the greater the risk of you suffering a loss, traders can close all the positions they hold before the end of the trading day and therefore minimise risk.
A third common strategy is support and resistance levels. This involves researching the past fluctuations of a currency and using them to predict future price movements. The previous upper limit of a price is its resistance limit and the previous lower limit is its support limit. This can help traders make an educated guess as to when a currency's value may rise or fall.
Now that you understand the different types of currency pairs, you can learn more about forex markets in our forex trading and forex for beginners guides.
Before you start trading forex, you should make sure that you are well aware of all the risks involved with this sort of trading. These include the following:
Trade forex and CFDs across a number of financial markets and choose a trading platform that’s right for you with AvaTrade.
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Learn how to use different forex trading strategies and manage your risk when trading FX and CFDs.
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I came into my second week of forex trading excited to make more profit.
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My first week of real currency trading arrives.
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Before starting my currency trading journey I went to the experts for some face-to-face instruction.
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My three week currency trading journey begins.
Read more…Trade forex and CFDs across a number of financial markets and choose a trading platform that’s right for you with AvaTrade.
Learn how to use different forex trading strategies and manage your risk when trading FX and CFDs.
I came into my second week of forex trading excited to make more profit.
My first week of real currency trading arrives.
Before starting my currency trading journey I went to the experts for some face-to-face instruction.
My three week currency trading journey begins.
Interested in buying currency as an investment? Read our tips on being a forex trader, and find out about the strategies that investors use to realise a profit.
With competitive spreads across more than 50 major and minor currency pairs, GO Markets offers 24/5 trading on global forex markets.
Join the world’s largest social trading network, and learn from experienced forex traders with eToro Australia.
Forex refers to the foreign exchange market, where international currencies are traded against each other for a profit or loss. Learn the basics before getting started.
I’m based in England, but my money is in an Australian bank, can I do forex deals from England (online) through an Australian broker? Any gains or losses would go into and out of my Australian account. I currently have no Australian address, but can provide a friends address if necessary. I’m British but hold Australian residency status.
Hi Martin,
Thanks for your inquiry.
When engaging to the international trading in Australia, the general eligibility requirements for personal applicants will include:
– Be over the age of 18
– Have an Australian residential address
– Have a valid contact number
If you’ve already chosen a platform, I would suggest that you contact the provider directly so they can advise about your eligibility based on your circumstance.
Cheers,
May
Sir/Madam,
hello my name is mar and i am from india i’m learning about forex trading for 3 years and thus want to move to australia to do forex trading only. It is possible to migrate to australia to do forex trading only thank you
Hey Mar,
Thank you for reaching out to us.
You may find useful information on our page on Australian Immigration Guide.
As finder is a financial comparison website providing general information, it would be best to seek professional advice on your concern.
You may opt to seek help from a Migration Agent to advise you on the type of visa you can apply for and guide you through the process of your application.
I hope this helps.
Cheers!
Maria