If you’re planning to invest in foreign exchange trading, you really need to read do your research.
This article will act as your starting point. We’ll give you an overview of what FOREX is, how it works, the pros and cons, and we’ll help you decide on if it’s really for you. If you decide that it is for you, we’ve even given you a list of online forex brokers to look at if you want to start trading.
What is the forex market?
The forex market is where investors (or traders like you) buy and sell currencies. People around the world, whether they realised it or not, rely on currency exchanges for them to buy and sell or conduct foreign trade and business transactions.
For example, if you’re shopping on Amazon, you know that the item you want to buy and ship to the Philippines has a corresponding value in dollars. Depending on the current market value of the Philippine Peso versus US Dollars, you either save or spend a few more bucks because of the fluctuating prices of these two currencies. You’d have to check the exchange rates of these two currencies before you click “Buy Now” button.
Similarly, when if you’re travelling to Osaka, you need to check the exchange rates of Japanese Yen and Philippine Pesos, so you know how much money you’ll bring.
The demand to exchange currencies is the main reason why forex trading is one of the largest and most liquid markets globally.
One of the unique characteristics of forex markets is that currency trading can be done via computer networks among traders around the world, rather than going to one centralised exchange. When you start trading in forex markets, you get access to the markets and tools 24/7.
Major currencies are traded worldwide across financial hubs from New York to London and Singapore. The prices of these currencies continually fluctuate throughout the day, but you can divide the timezones into three for global trading: Australasia, Europe, and North America.
How does forex trading work?
Forex trading requires a high-level understanding of fundamental and technical analyses. You also need to set aside time as a trader. It’s a type of investment where you get gains from 0 to 50% in just one “click.”
You can have profits instantly if you’re going to hustle for hours studying and monitoring the markets. It’s one of the fastest-paced markets where traders analyse the movement of currencies in real-time.
Once you’ve submitted your documents online and funded your account with your chosen online broker, you can start buying and selling currencies. The changes in currency values are very minimal. At times perhaps, you’ll see less than a 1% change in value.
This type of trading has the least volatility compared with stocks and cryptocurrencies such as Bitcoin. However, it’s still volatile.
Here’s an example of global currencies from Bloomberg’s data. These are not the actual prices as of this time. These are for illustration only.
Values of currencies can’t be manipulated easily. The prices are still based on the objective considerations of demand and supply from a worldwide movement. Even the most significant players like central banks can’t move the prices at will. As a currency trader, you need to monitor the exchange rates and currencies.
Quick Wins and Gains When You’re in Forex Trading
Because this is one of the most liquid markets, you can profit from quick gains.
It’s a liquid market
A liquid market means there are many bids and offers and low volatility. It’s easy to trade at your desirable price because of many buyers and sellers. 1.5 trillion dollars are traded in the forex each day.
Diversification of portfolio
You can diversify your portfolio because currencies move in pairs and the changes are related to each other. But you need to understand the currency movement as where one currency pair is going. Will it increase or decrease? If you believe that the PHP pesos will increase against USD dollars in the next few months, you buy PHP long.
The rise and fall of the values of currencies can unlock opportunities for you to make profits, but again this will require you to invest more time in analysis and studying.
Flexibility in trading hours, 24/7
Here’s one thing you’ll love with forex trading; its trading hours are flexible. When you invest in the stock market, the trading activities are limited to the stock market’s operating hours. For example, the Philippine Stock Exchange is open from 9:30 AM – 12:00 PM and 1:30 PM – 3:30 PM, Monday-Friday. In forex trading, you can have access for a more extended period. Real-time trading allows you to act quickly.
Most of the trading in forex doesn’t require paying a direct commission to the firm. Instead, the “commission” is built into a bid/ask spread across the pair of currencies when you trade them. The spread differs among the currency pairs. The difference in prices between the bid and ask is the spread where brokers make money.
Whilst these factors all sound enticing, remember, where there are gains to be made, there are also losses.
What are the Risks Involved in Forex Markets?
Political instability, economic issues and other external factors that you don’t control could affect the prices of currencies in the market. The risk involved in forex trading is higher than expected even if there is only an incremental increase in foreign currencies.
High leverage risk
The values of currencies move in small increments. When you’re trading, you can increase your investment which will mean you can increase your potential profit or your potential loss – this is what we call maximising your leverage.
For example, you can enter a position for P10,000 worth of currencies, and you only need P1000 using a 10:1 leverage expressed as a ratio. Your online forex broker provides these leverage ratios based on what’s allowed in your region, let’s say in the Philippines the broker allows 10:1.
That means for every P1,000 you put up, you can trade P10,000 of a major currency.
When you use the 10:1 leverage, you can gain an exposure to trade ten times more than what you deposited to fund your trade.
To understand this further, it’s like giving a 10% downpayment on a condo unit. You get to access the entire condo even if you only funded 10% of the total cost.
Still using the 10:1 leverage; if you put up P5,000 as your margin, which is your collateral on your trading account, the maximum of P50,000 (10 x P5,000) can be in your trading positions.
When you maximise your leverage and it pays off, you keep the profits. But if you use high leverage when the markets are against you also bear the losses. When the losses are going beyond the minimum margin (e.g. the P5,000 mentioned above) the broker closes the trade due to insufficient margin. It can’t position the P50,000 trade anymore. And of course, this results in losses.
In connection to the previous point, when volatility is present in the market, aggressive use of leverage can result in a significant loss. Remember, the prices are highly volatile as well, so even if while you’re trading in real-time, just a little bit of political unrest can affect the price.
For example, you’re trading USD and other currencies, a random tweet from President Donald Trump about the dollar and foreign trade policies can affect the “spread.” The price you’ve been planning to buy will suddenly change all because of a tweet.
Similarly, a reckless statement from President Rodrigo Duterte regarding foreign policies could affect the value of pesos like it did in May 2010 in September 2016 when he lashed out international leaders.
How to start trading: Check these online forex brokers in the Philippines
Forex trading is via online, most of these online brokers are headquartered overseas. These brokers are regulated in their respective countries (e.g. Australia and Unites States) and can, however, accept Filipino forex traders as long as you submit the required documents for verifications.
Since forex trading is online, you must understand that there is inherently a risk involved in these kinds of transactions. It’s important to do your research as to what brokers you can trust.
Remember, you need to invest time, energy, and efforts into learning forex trading before you create or set up your account.
Here are the 5 forex brokers you can review, check their credibility, and compare. You can also sign up for a demo account to test the platform.
|Broker||Minimum Deposit||Welcome Bonus||Regulator|
|AvaTrade||$100 (P5,000)||40%||ASIC, FSA, FSB, MiFID|
|FXTM||$10 (P500.00)||N/A||CySEC, FCA, FSC, FSCA, IFSC|
|AxiTrader||$0||N/A||ASIC, DFSA, FCA, FMA|
5 Signs forex trading isn’t for you
It can be exhilarating to know that you can profit from forex trading – especially once you get to learn the fundamental and technical analyses. However, it’s definitely not for everyone.
If you are guilty of any of the below, we’d recommend looking into other, more low risk, investment options.
- You lack knowledge of the markets – you don’t understand what leverage risks are, and you don’t know how fundamental and technical analysis work. You also don’t like to spend your day analysing or studying charts, lines, and candlesticks.
- Too emotional – you can’t manage your emotions when the markets experience volatility. You buy and sell currency pairs because you “feel” like they’re going to increase. You’d see yourself crying or emotionally unstable when you lose 100% in one click.
- No time to monitor the trends and news – trading requires time and effort to watch out for industry news and market trends in real-time. You don’t even have time to do the laundry or wash the dishes or clean your apartment.
- Finances are not in order – Save first before you invest. If your finances are not yet in order and you want quick cash, it’s better to choose other options as trading can never promise you quick gains if you don’t do your homework. Save first, have emergency funds, get life insurance, and then start investing.
- Worried about the volatility of prices – you don’t have control over political and economic issues globally, and other infinite factors could affect the currency movements. If you’re not ok with the prospect of not being totally in control of the outcome, it’s best to put your money elsewhere.
Thinking of other ways to invest? A guide on how to invest in the stock market is a great start. But if you think forex trading is for you, drop your comments below and share what you’d like to know about the markets.