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When investors trade currencies in the large liquid foreign exchange market, they’re engaging in forex trading. Forex — short for foreign exchange — offers opportunities to turn a profit in the world’s most traded 24/7 market, where traders exchanging one currency for another at an agreed price.

Given its complexities, forex trading is highly suited to experienced investors, though many new traders quickly succumb to the excitement of this dynamic market.

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How does forex trading work?

Forex traders come to the market with one main aim: profit from the sometimes minute changes in value of one currency against another. They do this by basing their investment decisions on whichever way they think forex prices will fluctuate in the future.

For example, if experts anticipate that the Singapore dollar will decrease in value against the US dollar, forex traders will sell their Singapore dollar dollars and buy US bucks. If the US dollar then increases in value, the trader gains greater purchasing power to buy more Singapore dollars than they initially had — resulting in a tidy profit.

On the global forex market, currencies are quoted in pairs — that is, in terms of their value against other currencies. In the forex market, these pairs are expressed as SGD/USD, GBP/EUR and USD/GBP. You’ll sometimes hear these pairs referred to by nickname. Keeping things lively, AUD/USD is often called the “Aussie,” EUR/GBP the “Chunnel,” GBP/USD the “cable” and USD/CHF the “Swissy,” among others.

What are the benefits of forex trading?

The right investor will find that forex trading offers a wide range of advantages, including:

• Large market size. Forex is the world’s largest financial market, with trades going on at all hours. This breadth of market is one of the key reasons that give forex trading plenty of opportunities for profit.
• Low learning curve. Compared to other financial instruments, forex has relatively low barriers to entry and learning curve, making it an ideal starting point for beginners. It does not require a large initial investment and much trading skill.
• 24/7 accessibility. Unlike the New York Stock Exchange, which is open weekdays only from 9:30 a.m. to 4 p.m. EST, the global forex market runs Monday through Friday around the clock. This means that forex prices constantly fluctuate, offer plenty of investment opportunities for traders.
• Low transactional costs. Transaction costs in the forex market are typically included in the price, in the form of the spread. Some brokers may also charge a commission on top of the spread, which may either be a flat fee or based on a percentage of the transaction amount.
• Ability to go long or go short. If you speculate that a currency pair is going to increase in value, you can purchase it (go long). Similarly, if you believe that it’ll decrease in value, you may sell it (go short). This means that the forex market offers profit potential from both rising and falling prices.
• Can benefit from leverage. Leverage allows investors to conduct a trade without putting up the full amount of that trade, controlling a large amount of money using a little of their own and borrowing the rest. This means there is a much higher potential for profit from a small initial outlay. Unfortunately, this also means a greater risk of suffering a loss.
• Market with high liquidity. When trading, liquidity refers to the ease with which an asset can be quickly converted into cash. This is dependable on how active a particular market is. The global scale of the forex market combined with its high trading volume and 24-hour accessibility, make the forex market the most liquid market in the trading world.
• Forex volatility. The forex market can be highly volatile, which means that there can be significant movements in currency values, which in turn may lead to opportunities for substantial profits.

What forex trading platforms are available?

Several forex trading services are available to Singapore investors, some geared toward beginners and others for experts.

How to compare forex brokers

Here are some considerations to have when deciding on a forex broker:

• Regulatory compliance. The most important thing to check when choosing a forex broker is whether it’s registered as a member of a regulatory body. For forex brokers operating in Singapore, make sure to check if it’s regulated by the Monetary Authority of Singapore (MAS). This ensures the safety of deposits and the integrity of the broker.
• Currency pairs offered. While there are many currencies available for trading, you’d most likely focus on a handful that has the greatest liquidity or interest you most. Some of the most popular trading pairs are SGD/USD and GBP/USD.
• Low spreads and commissions. Forex brokers charge a spread, which is the difference between the bid and ask of a forex pair. Spreads can be narrower or wider based on a variety of factors, and lower spreads mean less cost for traders. Some forex brokers also charge commission fees on top of the spread, but do note that this may not necessarily mean that it’ll cost more than a broker that charges no commission since they can instead profit from wider spreads. So make sure to shop around for a broker with competitive fees.
• Initial deposit. Many forex brokers offer accounts with varying initial deposit requirements.
• Trading platform and tools. Many forex traders use the MetaTrader4 (MT4) or MetaTrader5 (MT5) platforms for trading. Some may also offer their own proprietary software. Regardless, make sure that the broker’s platform is sufficiently equipped with technical and fundamental analysis tools, customisation and other trading features that you need.
• Ease of withdrawal and deposit. Each forex broker has specific account withdrawal and funding policies. You may be able to fund your account with methods such as credit card, PayNow and bank transfer. As for withdrawals, brokers typically allow wire transfer and may charge a fee for the service. Make sure the broker you’ve selected offers convenient deposit and withdrawal options.
• Customer service. Forex trading is available 24 hours a day, so the ideal forex broker should offer responsive and round the clock customer service. Check if the broker has live chat or phone support options, as well as their average wait times.
• Demo account. Brokers often provide paper trading accounts with virtual funds for customers to test their trading strategies without having to risk any money in real life.
• Additional services. Other beneficial extras that forex brokers might provide is access to the latest news, market analysis, trading strategies and other educational materials such as webinars and courses.

What are the costs involved in forex trading?

As with any other form of investment, you need to carefully review the fees and charges that apply specifically to trading forex:

Margin

To start, compare among a range of providers the margin you’re required to meet in order to make a trade. This margin of 0.5%, 1% or more will affect the total amount you’ll spend to buy or sell forex. For instance, if your account has a margin of 1%, a trade worth $100,000 will require you to spend $1,000.

Commission

In addition, most providers charge a commission for every trade you make. These fees can be as low as a few cents per thousand dollars, but some providers charge no commission on your trades. You may pay a fee to pay by credit or debit card.

Spread

Finally, consider the spread — or the difference between the buy and sell prices for each currency pair. The spread is effectively what a broker or trading platform charges you to make a trade. Look for a trading platform that offers tight spreads to minimize your overall costs.

What are some common forex trading strategies?

With so many experts touting strategies for nearly any kind of investment, it’s no surprise that you’ll find several strategies for trading forex — from the basic tools to complex approaches.

One common strategy is to perform technical analysis or fundamental analysis to more solidly predict the future performance of a currency pair. Also common is a day-trading strategy, which is based on the simple premise that you don’t hold forex positions overnight. In general, the longer you hold open a position, the greater risk of suffering a loss. To minimise risk, traders can close all positions held before the end of the trading day.

A third strategy is researching the past fluctuations of a currency and using what you’ve learned to predict future price movements. The previous upper limit of a price is called its resistance limit, and the previous lower limit is its support limit. Traders use these resistance limits and support limits to make an educated guess as to when a currency’s value might rise or fall.

What are some of the risks associated with forex trading?

Before you start trading forex, research and understand the risks involved with this sort of trading.

• Even though you’ll put down only a small percentage of the value of your trade up front, you are ultimately responsible for the entire amount of your trade.
• Forex rates are volatile and can quickly move against you, possibly resulting in a significant loss of money.
• Markets are open 24 hours a day, which can result in devoting plenty of time to tracking open positions.
• Predicting currency markets is difficult, and a wide range of factors affect currency pairs.
• Even a stop-loss order — a hedging tool designed to minimise your losses — offers only limited protection against the risks involved.

What do I need to open a forex trading account?

Most forex trading platforms allow potential traders to apply online for an account within minutes. The application process varies by provider, but you typically complete an online application and then wait to learn whether your application is approved.

To comply with the law, a provider may require you to supply:

Frequently asked questions

• How can I tell if forex trading is for me?

  Once you’ve familiarised yourself with the risks involved in trading forex, consider opening a demo account with a forex trading platform. Playing with trades will help you see if you have what it takes to successfully trade forex.

• What is a pip?

  Short for “point in percentage,” a pip is generally the smallest movement an exchange rate can make. In most cases, a pip refers to the fourth decimal place of a currency — for example, the “5” in 1.445. In trading platforms with fractional pips, it can refer to the fifth decimal point — or the “6” in 14456.

  In some currency pairs, a pip can refer to the second decimal place — the “4” in 89.84.

• What are the most commonly traded currencies?

  The most commonly traded currencies include the US dollar, the Great British pound, the euro, the Japanese yen, the Swiss franc, the Canadian dollar and the Australian dollar.

• When can I trade on the forex market?

  Due to international time differences, the forex market is open 24 hours a day from 5 p.m. EST on Sunday to 4 p.m. EST on Friday. As Eastern Daylight Time (EST) is 12 hours behind of Singapore Time (SGT), it’ll be 5 a.m SGT on Monday to 4 a.m SGT on Saturday for traders in Singapore.

• A forex trading platform is offering a free trade — should I sign up?

  It depends. Carefully read the fine print of any promotional and compare its features and fees against other platforms.

• I've never invested before, but I'd like to start. Is forex a good option?

  Trading forex can be complex and features a lot of risk. Before getting started with trading forex, learn about all your investing options, research the risks involved and establish a maximum amount you’ll experiment with.

• What is an intraday position?

  An intraday position is a trade that’s opened and closed during the same trading day.

• What is an overnight position?

  An overnight position is a forex trade that’s still open at the end of normal trading hours.

• What is a stop-loss order?

  A stop-loss order is a hedging tool that allows your brokerage to buy or sell a currency at a price that you specify.

  For example, if you currently hold the USD/JPY currency pair and the price is USD/JPY = 100 (meaning $1 buys 100 yen), you might put in a stop-loss order to sell at USD/JPY = 98. This means that once the exchange rate hits 1 USD = 98 JPY, your brokerage will automatically sell your holding.

• Does the global forex market have a central location or exchange?

  No. Forex trading is conducted among a global network of banks, institutions and individuals around the world.

• What factors can affect the foreign exchange rates?

  The value of currencies is affected by everything from supply and demand to economic conditions, political conditions, interest rates, inflation and consumer confidence.

• What else should I be aware of when trading forex?

  Many first-time traders are unaware that forex trading places them at risk of losing more than their initial investment. However, it can be easy to lose your shirt if you’re not prepared for the full consequences of your trade.