Our favorite forex brokers
- Best overall: Pepperstone, CITY Index
- Best for automated trading strategies: FXCM
- Best for range of trading options: City Index
- Best for customer service: ThinkMarkets
What is forex trading?
Forex, also called FX by traders, is short for foreign exchange, trading one currency for a currency from another country or region, like trading AUD for USD or AUD for Euros. If you’ve ever traveled to another country and have exchanged your currency for a local currency, you’ve been exposed to forex. Banks and corporations are a huge part of the forex market. Forex is at the heart of a global economy, making it larger than any other financial market, including the stock market.
Forex trades serve both as utility as well as allowing profit in trades from one currency to another. Currency values fluctuate relative to each other which creates an opportunity for traders to realize gains from the difference. Because most forex trades utilize leverage, a relatively low amount of capital can control a much larger amount of currency. At 1:50 leverage, a 10,000 AUD trade can be executed with just 2% of the full trade price as margin, 200 AUD.
A forex pair is two currencies that are compared or exchanged in a trade, like a trade of AUD for USD or British pound sterling (GBP) for Swiss francs (CHF). Euros and USD are the pair most commonly traded, but a number of currencies trade in extremely high volumes, including AUD, which was the fifth-most traded currency worldwide in 2017. A forex pair has two currencies, with the first currency listed as the base currency and the second currency being the quote.
Profits or losses in forex trading are based on price movements within a currency pair. The base currency might go up or down, as might the quote currency, the second currency in the pair. Much like with stocks, losses or gains for traders exist on paper until you close the position. However, there can be several additional ways in which a forex trade can cost money before you exit the position due to overnight swap rates or possible margin calls that can require additional funding or even liquidating part or all of your position.
Price movements in forex can be volatile, particularly when amplified by high leverage. With some brokers allowing leverage of over 1:1000, traders can potentially multiply their profit on a forex trade by a corresponding amount. Even small price movements can have a massive impact on the value of a trade. Currency prices don’t always go up, however, so the same leverage that can lead to massive gains can also create massive losses if the direction heads south on a purchased currency.
The cost of one currency relative to another currency is the exchange rate. Currently, the exchange rate between AUD and EUR is 0.63829, meaning you can purchase a little over 6/10 of a euro with an Australian dollar. This rate will be different later today, with a yet another rate tomorrow. Currencies trade all day and night all around the world and prices can be moved by increases or decreases in supply or in demand as well as by news, such as interest rate changes or political events.
Many of the quotes you’ll see for exchange rates are simplified and may only be carried to two decimal points in the quote. In trading, most currencies use five decimal points. The 4th decimal point is called a Percentage in Point, more frequently called a PIP. The fifth decimal point, when used, is a fractional pip, or a pipette. These may seem like miniscule values — and they are — until you start looking at the total value of currencies traded. Small moves at the third or fourth decimal point can mean dollars on larger trades. At the current exchange rate with USD, a seemingly small 3 pip — 3/10,000 of a unit — move up or down on a 10,000 unit order is enough to buy a high-end espresso in Melbourne. Those small moves can add up quickly on sufficient volume. If trading in Japanese yen, the pip is the second decimal point and the pipette is the fractional pip.
Calculating pip value
To calculate pip value, the value to you as trader for a one-pip move, you can use an equation with just three elements:
1/10,000 (a pip) ÷ Exchange Rate x number of units = pip value
|Pip change||Exchange Rate||Units||Pip Value|
If the exchange rate (or bid) for AUD/USD is .8105 and you have a 10,000 unit order, each single pip move is worth about 1.23 AUD.
Top traded currencies
Among the hundreds of currencies worldwide, these are the top ten most traded in the past year, accounting for most forex trades
1. U.S. dollar – USD
2. Euro – EUR
3. Japanese yen – JPY
4. British pound sterling- GBP
5. Australian dollar – AUD
6. Canadian dollar – CAD
7. Swiss Franc – CHF
8. Chinese renminbi – CNY
9. Mexican peso – MXN
10. Swedish crown- SEK
Forex lot sizes
Forex trades use lots to measure quantity in the base currency. A standard lot is 100,000 units, but many trades use smaller quantities.
- Standard Lot = 100,000 units (1 lot)
- Mini Lot = 10,000 units (.1 lot)
- Micro Lot = 1,000 units (.01 lot)
- Nano Lot = less than 1,000 units (varies depending on quantity)
Nano lots are less than 1,000 units and are available through some brokers. Smaller trades like nano lots can be a way to begin trading forex, but will limit your gains due to their limited scale. As an upside, your losses are also limited when using a smaller scale.
Types of orders
Forex trading often uses the same types of orders most commonly used in stock trading. Unless performing complicated trades, these four trades represent the order types used in most forex trades. Other types of orders may not be supported by all brokers.
- Market order – fills your order at the best available price
- Limit order – fills your order only at a specific price and won’t execute if that price is not reached
- Stop order – sells your holdings at a specific price and won’t execute if that price is not reached
- Stop loss order – sells your order automatically at a specific price to avoid further losses
Forex trading risks
Forex trading has a number of unique risks not found in other types of trading but has the potential to outpace returns from other types of trades.
Exchange rate risk
Forex is a fast-moving market, especially when leverage is used. Seemingly small pip changes can create massive swings in trades.
While leverage can super-size gains, a significant drop on a leveraged trade can wipe out gains just as quickly or even force a margin call or a liquidation of your position — at a loss.
Volatility or variability are the changes in price quotes over a period of time. Opening or closing a position as prices move up or down can be more challenging when volatility is high and price swings are wider.
Changes in key interest rates or even news or trends that lead the market to think interest rates can be impacted can affect prices of currencies, creating selling pressure or increasing demand for currencies.
Fiat currencies derive part of their value from the trust the market has in the government of the currency’s country or countries in currency’s region. A failure for a country to pay its national debt or concerns over the viability of continued payments can drive the value of the currency
Brokers are like any other business in that they can become overexposed to events or overleveraged. Regulatory agencies like ASIC or the U.K.’s Financial Conduct Authority (FCA) help to ensure that brokers meet their guidelines for trading or managing funds, but that doesn’t guarantee that a broker will never become insolvent or never go against regulations designed to make trading safer.
If a currency held in a trade falls out of favor due to news or events, traders may find fewer trading opportunities to exit the position at a favorable price. Similarly, if demand is high, trades at a target price may be more difficult to achieve due to fewer sellers in the market.
How we made our selections
There are a lot of great brokers for forex traders in Australia. We had to choose a handful to highlight and each has its unique advantages. We looked at some key areas.
Spreads: In most cases, forex brokers earn their money by using a spread between the bid price and ask price. A broker with tighter spreads generally takes less profit from the trader, although other fees or expenses may apply to some trades.
ASIC regulation: Brokers that apply for ASIC regulation must have minimum capital holdings of $1 million AUD and keep investor funds segregated from broker funds to provide an extra layer of safety for investors.
Cash management: Brokers that provide multiple ways to fund your account make trading easier and allow traders more options to capitalize on new trading opportunities. Moving money out should also be hassle-free.
Trader tools: From charts to news feeds to historical data to demo accounts that allow traders to test strategies without risking real capital, the quality of trading tools available from a broker can be the differentiating factor if all other factors are relatively equal.
Customer support: With many forex brokers offering 24-hour support, customers have come to expect that brokers will have one or more ways to reach out if they have questions or to report problems with their account or the platform.
Best overall: Pepperstone
Founded in 2010, Pepperstone has already garnered a number of prestigious awards, including a #1 rating in six key areas by Investment Trends, a privately owned financial services industry research company. Pepperstone is regulated by the Australian Securities and Investment Commission (ASIC) in Australia as well as the Financial Conduct Authority (FCA) in the UK, which assures investors that the company has to adhere to strict compliance to protect investor funds.
Pepperstone bills itself as a company for traders by traders, and Pepperstone’s commitment to cutting-edge technology is evidenced by fast execution times and market-leading trader tools. Also rated #1 for customer service, value, spreads, and fund withdrawal options, Pepperstone is keenly focused on the customer and allowing traders to maximize opportunities.
Best for automated trading strategies: FXCM
As one of the largest forex brokers in the world and a pioneer in online forex trading, FXCM is an established worldwide brand. FXCM’s Trading Station platform puts traders in the pilot seat with 58 technical indicators available to help guide trading decisions. Automated trading robots are also on standby to execute trades according to criteria you choose.
FXCM’s long history spans three decades and has given the broker footholds in major worldwide markets, a plus for trader security as four major jurisdictions provide regulation for FXCM, including Australia’s ASIC and the U.K.’s FCA.
Best for range of trading options: City Index
City Index is a long-established broker founded in 1983. Where City Index distinguishes itself is in the number of trading options it offers, its options expand to include less frequently traded pairs and allows traders to capitalize on opportunities in either larger or smaller markets worldwide. Trading costs with City index remain competitive with other platforms and an expansive library of learning materials couple with leading-edge trading tools to meet the needs of traders regardless of experience level.
Best for customer service: ThinkMarkets
Originally founded in New Zealand, ThinkMarkets relocated its headquarters to Australia in 2012, obtaining ASIC regulation in 2015. The company is also regulated by the U.K.’s FCA, providing an extra layer of oversight and compliance. With three account types, ThinkMarkets caters to traders at all levels, but some benefits are not available to standard accounts, such as an assigned account manager. Standard accounts, however, are commission-free, providing an easy-to-understand spread as the only trading expense.
Leverage of up to 1:400 is available for accounts with lower balances, with 1:50 leverage for the largest accounts. ThinkMarkets also offers cryptocurrency CFDs, including Bitcoin, Ethereum, Ripple and several other cryptocurrency trading options. Top indices, shares for 125 equities, and a selection of popular commodities round out the offering.
An award-winning multilingual customer service team provides 24-hour support for traders and free trading guides and webinars help to ease new or intermediate traders into the forex trading world.
The forex market is massive and the rapid evolution of online trading platforms makes the opportunities to trade forex more accessible than ever. Beginning traders can learn the ropes with risk-free demo accounts and take advantage of extensive libraries of learning materials and webinars.
The question of choosing the best forex brokers for trading in Australia is a question with a number of great answers. Do your own research to find the best fit for your specific needs and choose a forex broker regulated by ASIC. ASIC’s requirements for minimum capital holdings and segregated accounts help to reduce risk so traders can focus on trading opportunities in the rapidly growing forex market.