Forex Risks and Benefits

Only recently, trading in forex, short for foreign exchange, was in the domain of large institutions and retail participation was not possible. However, the Internet and emergence of online trading platforms has changed all that. It is now possible for retail traders to trade in currencies through online brokerage accounts.

Forex is a highly fast-paced market where prices change every minute. However, daily currency fluctuations are very small, usually less than one percent in a day. To increase the value of small price movements, currency traders rely on the availability of enormous leverage that can be as much as 250:1. The fact that the forex market is highly liquid has made it possible for brokerages to offer high leverage as it addresses the issue of risk associated with it. The availability of leverage also makes it more volatile than it appears on paper.

Trading in currencies, just like trading in other financial markets, is a risky proposition. The very same leverage that increases the potential for profit for traders is responsible for huge gains turning into losses that can sometimes wipe out the major part of your account with the forex broker.

The forex market is also the largest financial market in the world involving large number of players dealing in larger amounts of money. Moreover, the currency market is open round the clock. It is thus important for beginners to understand that traders’ reaction to information released into the market is almost instant, which leads to constant movements in exchange rates of currency pairs. Although currencies do not move as sharply as stocks, the availability of leverage and the large size of individual contracts, makes forex trading as risky.

The Uniqueness of FX Trading

In the FX market you are not really buying or selling anything even if on the face of it appears that you are buying one currency and selling another. It is basically a speculative market and there is no transfer of ownership of any currency in any case. Trades are simply accounting entries and profit or loss is netted or calculated on the basis of market price. A trader’s account is credited or debited in the currency in which it has been denominated. For example, even if the exchange rate of EUR/USD is quoted in US dollars, an Australian dollar denominated FX account will be credited in AUD.

The existence of FX market is basically for the purpose of facilitating exchange of currencies for exporters, importers and other trade related international transactions including payroll and mergers and acquisitions. However, trade related needs for foreign currencies amounts to only about 20-25 percent of the daily turnover in the FX market. Such transactions are in the domain of large banks that buy or sell foreign currencies on behalf of their clients. The rest is all speculative trades initiated by multinational banks, large financial institutions, hedge funds and even high net worth individuals. In fact, the FX market opened for the small individual investor only recently, thanks to the Internet.

In essence, when a trader initiates a trade, he is actually buying one currency and selling another because currencies are traded in pairs. If a trader buys a standard lot (equivalent to a hundred thousand units) of AUD/USD, he is essentially exchanging USD for AUD. It is almost similar to exchanging cash for, say, a laptop except that no transfer of ownership is involved in FX trading. However, the transactions may only be accounting entries the effects are as real as any other trading activity.

Setting up a Forex Singapore Account

Forex trading involves buying and selling currencies. The forex market is among the most liquid markets in the world and offers great opportunities for making good profits with little investment. If you want to join the bandwagon, the first step is to open a forex Singapore account.

There are three types of accounts that you can choose to open with a forex Singapore broker – mini, standard and managed. The factors that can influence you decision are:

- Risk appetite.
- Initial investment.
- The amount of time that you can afford to devote on daily basis.

When we talk of standard and mini accounts, the reference is to lot size. Lot size in turn refers to units of currency. A standard lot is worth $100,000. However, that does not mean that you have to deposit SGD100, 000 in your account to be able to trade. Forex trading is done on the basis of leverage and margin. A typical forex Singapore broker offers 100:1 leverage, which means that your initial investment in the margin account is only SGD1, 000 for trading one standard lot.

A stand account with forex Singapore broker gets you better service and perks and also increases the profit potential. Each pip is worth 10 dollars and if the position moves up by 100 pips, you stand to gain SGD1, 000, something that is not possible in other accounts unless you trade more than one lot.

A mini lot is worth is worth 10, 000. It is one-tenth of a standard lot and so is the gain potential. In a managed forex Singapore account you simply put up the money and the trading is done by the broker on your behalf.