What Is Forex Trading?
The act of buying and selling foreign currencies in a decentralized market is called forex trading. The Forex market is one of the biggest and most liquid markets in the world . On average, the forex market undergoes a daily trading turnover of more than 5 trillion US Dollars.
How Does it Work?
Forex trading involves three main participants, including traders, brokers, and liquidity providers (market). Traders buy and sell currencies in the market using a trading platform and other services provided by a broker. The exchange rate of currencies fluctuates depending on market demand and supply. The continuous fluctuation in prices allow traders to make profits.
Trading currencies is a two-way process that is you buy one currency and sell the other. Therefore, in forex trading you always trade a currency pair. Your broker will quote the current market price of your chosen currency pair as an ask/bid price. For example, AUD/USD – 0.76190 / 0.76193.
The bid price is the highest price a buyer is willing to pay, while the asking price refers to the lowest price a seller might accept. The difference between the two prices is known as the spread. Brokers charge spread as a compensation fee for providing traders access to the forex market.
After we know how forex trading works, let’s figure out how traders earn profits. Using the same currency pair we quoted above, let’s assume; you wish to buy 1000 USD. Since the exchange rate of 1 USD is equal to 1.31 AUD, you need to pay 1000 x 1.31 = 1310 AUD to buy 1000 units of US Dollars. After a few days, the Australian dollar depreciates against the US dollar, and the new exchange rate of 1 US Dollar reaches 1.35. Now selling back US Dollars against the Australian Dollar can bring you a 4 cents profit on each dollar sold. So, you earn a net profit of 40 AUD i.e 1000 x (1.35-1.31) = 1350 AUD.
Pros And Cons of Forex Trading
Besides being extremely profitable, forex trading is also very risky due to high volatility and economic events affecting prices. Listed below are some main pros and cons of forex trading;
- Quick to start – Unlike other businesses, forex trading involves no formalities. Anyone with or without previous trading experience can kick off a trading journey easily. Also, traders don’t need to have large investments. Traders can get started with as low as $50.
- Leverage – Leverage is the borrowing money that brokers offer to their clients, allowing them to trade higher volume with little investment. The amount of leverage varies from broker to broker. Most brokers offer leverage between 1:30 to 1:500. Use of higher leverage can sometimes be extremely dangerous and cause losses beyond your expectations.
- Liquidity – The forex market has higher liquidity levels that means all your orders are executed in no time.
- Affordable Costs – Except for paying a spread on a currency pair, there is no other cost involved in forex trading. However, sometimes you need to pay a nominal commission for holding overnight positions. So we can say, forex trading involves less costs as compared to other investment options.
- Tax Benefits – In most countries, profits generated from forex trading as a passive income stream are tax free. On the other hand, whether you run a business or receive a employment salary, you have to pay income tax.
- Copy Trading – Forex trading does not require traders to be actively involved in trading all the time. Instead, you can even set your account for automated trading using robots, copy trading, or fund management services. Also, there are some set & forget trading strategies that allow traders to carry on forex trading business on a part-time basis.
- Demo accounts – Most businesses do not allow you to have a second chance if you remain unsuccessful in your first attempt. However, in forex trading, you can use demo accounts for practicing unlimited trading and money management strategies without losing any money.
- Volatility – The foremost drawback of forex trading is its extreme volatility levels. The forex market can sometimes behave so unpredictable that even the most experienced traders suffer losses.
- Regulatory Limitations – Despite strict regulatory framework for forex intermediaries worldwide, the forex market is full of dishonest brokers.
- Less Residual Returns – Unlike bond or stock markets where you are eligible to receive interests or dividends, the only profit you can expect in forex trading is from the rise or decrease in exchange rates.
How To Start Trading Forex in Australia
With an average forex trading turnover of $119 billion per day as of 2019, Australia’s forex market has become one of the most active markets in the world. The country has a strict regulatory framework in place for financial intermediaries and forex brokers. The Australian Securities and Investment Commission (ASIC) is the prime regulatory authority that regulates all financial affairs of institutions entrusted with public money.
Read: ASIC Regulated Forex Brokers
To start trading forex in Australia, first of all you need to set up an account with a forex broker. Try choosing an ASIC regulated broker. Being an Australian, you can enjoy many benefits by trading with an ASIC regulated broker, such as filing cases with a third-party dispute resolution authority, quick customer support, fast and cheap processing of deposit and withdrawals etc.
Read: Best Forex Brokers Australia
Once you have set up an account with a broker, then deposit some funds. Generally, brokers provide multiple payment methods such as card, bank wire, e-wallets and even cryptocurrencies. Select your preferred payment method and proceed with your desired investment amount.
It is important to mention here that your broker might request your identity and address verification. This is a common practice among all regulated brokers. You can verify your identity by uploading a scan copy of your driving license or passport. Similarly, you can verify the address by providing a picture of a utility bill or bank statement.
Forex Trading Communities, Forums, and Discussion Groups in Australia
Forex trading becomes more interesting when you get some words of appreciation from your friends or other trading experts. There are many forums and discussion groups on the internet where you can learn new trading strategies and share your trading ideas with fellow traders.
#1 Aussie Stock Forums
Founded in 2004, Aussies stock forums is a well-known online trading community. With multiple informative posts and discussion threads on investment and trading activities across various financial markets, the forum is worth signing up.
# 2 Day Trading Australia Group
Day Trading Australia Group is a Facebook page that welcomes day traders from all over Australia and other countries. Along with informative posts on day trading, the page also covers tips and tricks on trading across different financial markets.
Forex Infuencers to Follow in Australia
#1 Learn To Trade The Market – Nial Fuller
With more than 200,000 fans following on Facebook, Twitter, and Instagram, Nial Fuller is a professional forex trader based in Australia. His area of expertise includes forex price action strategies. He runs a popular forex education academy called Learn to Trade the Market.
#2 Forex Reviews – Timon Weller
Forex reviews is a popular blog that aims at educating people on price action forex strategies. Timon Weller is the man behind the blog. He’s a seasoned trader who is keen to help Australian traders with useful tips and trading ideas.
#3Trade Forex Gold Blog
Trade Forex Gold Blog is one of the most active blogs for Australian traders. The blog is owned and managed by a forex trainer, Rog Blackwell. His expertise in forex and precious metals helps traders to learn multiple dimensions of forex and stock trading.
Is forex trading legal in Australia?
Yes, forex trading is legal in Australia. Besides being one of the most liquid markets for traders, Australia is a home to many popular forex brokers. A government agency, known as ASIC, regulates the forex business in Australia.
What is the best time to trade forex in Australia?
If you want to trade Australian Dollar (AUD), then the best time to trade is the Sydney/Asian trading session. If you want to trade other currency pairs or commodities, then London and New York trading sessions, particularly in overlapping hours, are the best time to trade.
Is Forex Trading taxable in Australia?
Yes, income originating from forex trading is subject to taxes in Australia. As opposed to countries, such as Singapore, Malaysia, and the UK, forex trading in Australia is not a tax-free profession.
Can you make money trading Forex in Australia?
Yes, making money with trading forex is possible. You can make money with forex trading even if you know nothing about trading. You can join social trading platforms, such as ZuluTrade, and copy trades of successful traders.