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.
Best Australia Forex Brokers
- Best for Long Term Traders: Vantage
- Best for Global Capacity: Interactive Brokers
- Best for Copy Traders: eToro
- Best Execution: IG Markets
- Best Customer Service: Pepperstone
- Best for Automated Forex Trading: FXCM
Best Forex Brokers in Australia
Take a look at our recommendations for the best forex brokers down under.
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What is Forex Trading?
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.
Understanding Forex in AU
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.
Australian Forex Trading Strategies
At this point, you’ll need a trading plan that incorporates a profitable trading strategy to make your chances of success more likely. You can practice your trading and test strategies through a forex demo account with your trading platform.
The trading strategies you can implement depend on your level of experience and trading expertise are listed below. All of these strategies have yielded positive results for retail forex traders who have developed profitable trading plans. These strategies can work for forex traders whether they trade from Australia or from some other location.
- Scalping: a short-term trading strategy that involves taking advantage of small market fluctuations. Scalpers enter and exit the market quickly aiming to capture profits a few pips at a time.
- Day trading: a day trader limits trading activity to a single trading session. The day trader buys and sells throughout the trading session but generally liquidates all positions before the end of the session to avoid the extra risk of carrying positions overnight.
- Swing trading: Swing or momentum trading involves establishing forex positions based on the signals generated by momentum technical indicators. The main objective for this trading strategy is to capture a swing move by buying at a low exchange rate and selling at a higher rate or by selling at a high exchange rate and liquidating at a lower level. The strategy has no time constraints, so traders hold positions for as long as needed.
- Trend trading: A trend trader generally has a long view on currency moves and establishes positions accordingly. The strategy involves identifying long-term moves in a currency pair, establishing a position in the direction of the trend and then letting the trend conclude before liquidating the position.
- News trading: For traders who keep an eye on economic and geopolitical news, news trading might be the right strategy. This strategy involves taking advantage of sharp exchange rate moves seen immediately after the release of sensitive economic data or news of significant geopolitical events.
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 Worldwide
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 Example in Australia
Australia’s national currency is the Australian dollar (AUD) with the code A$. The Australian dollar is divided into 100 smaller units known as cents. The Reserve Bank of Australia issues and manages the value of the Australian dollar that ranked 5th in forex market turnover among global currencies in April 2019.
A recent quote for the AUD/USD exchange rate was 0.6920 U.S. dollars to 1 Australian dollars. If your market analysis leads you to expect an increase in the AUD/USD exchange rate, then you might buy 100,000 Australian dollars against the U.S. dollar today at that 0.6920 exchange rate.
If the AUD/USD exchange rate then rose to 0.7020, then you would use the calculation below to determine your trading profits:
100,000 AUD x (0.7020-0.6920 USD/AUD) = 1,000 USD
To then convert that amount of U.S. dollar profit into Australian dollars, you would need to perform the following calculation:
1,000 USD ÷ 0.7020 AUD/USD = 1,424.50 AUD
Conversely, if the AUD/USD exchange rate had instead dropped to 0.6820, then your trading loss would be:
100,000 AUD x (0.6820-0.6920 USD/AUD) = -1,000 USD
That incurred loss converted into Australian dollars at a AUD/USD exchange rate of 0.6820 would be:
-1,000 USD ÷ 0.6820 USD/AUD = -1,466.27 AUD
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.
Leverage risk: 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 risk: 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.
Interest rates: 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.
Sovereign risk: 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
Counterparty risk: 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.
Liquidity risk: 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.
Consider Trading Forex
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.
Methodology for AU Forex Brokers
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.
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