SMSF Investing Education & Strategies

Forex trading

The Foreign Exchange market, also referred to as the "Forex", "FX", or "Currency" market is the largest financial market in the world, with a volume of over US$4 trillion a day. Compared to the approximate $25 billion a day volume of the New York Stock Exchange, you can see how huge the Foreign Exchange market actually is. It equals more than three times the total amount of the stocks and futures markets combined! 

Forex trading is basically the simultaneous buying of one currency and the selling of another. Currencies are traded via a broker or dealer, and are traded in pairs; for example the Aussie and the US dollar (AUD/USD) or the US Dollar and the Japanese Yen (USD/JPY).

 

Due to the fact that you're not buying anything physical, investors can find this type of trading difficult to get their head around. One common idea is to think of buying a currency as buying a share in a particular country. When you buy, say, the US dollar, you are essentially buying a share in the US economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the US economy. In general, the exchange rate of a currency versus other currencies is a direct reflection of the general condition of that country's economy, compared to the other countries' economies.

 

Unlike other financial markets like the Australian stock market, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.

 

Until the late 1990's, only the institutions or very wealthy would play this game. To trade generally required a lot of money to start with! Forex was originally intended to be used by bankers and large institutions - and not by "retail traders". However, because of the rise of the Internet, online Forex trading firms are now able to offer trading accounts to 'retail' traders like you. All you need to get started is a computer, a high-speed Internet connection, and a plan. There are three broad categories of investment in Forex - trade yourself online, trade using broker/adviser recs, or use a fully managed account.

 

**Important Note : Due to the unregulated nature of the FX markets, and the potential for extra-ordinary profits, Forex is notorious for the number of SCAMS and dodgy practices that operate in this space. You have to be very, very careful and treat everything with suspicion until proved otherwise. There is a website called Forex Peace Army (www.forexpeacearmy.com) that exposes SCAMS and provides user reviews on everything forex, from brokers, to software, to signal providers and managed accounts. Highly recommended you use the resources on that site if your getting into Forex. Note however that most of these are international companies. Very few are Australian and hence hardly any are under Australian regulations and laws, so be careful.

 

To Trade Forex you will need:

To understand the Forex market - get educated !

An FX broker

A sensible trading strategy, using research and trade selection tools

 

Education

• It is imperative that if you are going to trade highly leveraged and volatile instruments such as Forex, you seriously need to understand the nature of the FX market, and the ways in which Forex works (and how it can blow you up if things go bad). Get educated - education is always your best investment. One of the best information and education websites available for both new and experienced Forex traders is www.babypips.com And its totally FREE.

 

Forex Brokers

This is all about low spreads, reliability, what features they offer that suit you and the type of trading you want to do, and the reputation of the broker in dealing with their clients. Forex brokers may be online or phone based (or both), and may also offer advisory trading services where they phone you with trade recommendations when they appear. Note also that some will be licensed and regulated in Australia, while others will not. See our Online broker comparison table as a starting point which includes forex offered by Australian brokers.

Research & trade selection tools

If your going to be successful in trading FX yourself, you absolutely need a logical plan or methodology for trading that is underpinned by a robust, prudent process. This can take a number of forms:

 

FX Signal Providers :

These are companies that will use a particular trading strategy, and will send you the entry / exit signals via email or a website login. One of the biggest problems is finding one that is legitimate, and has a REAL track record. Many of these companies only provide "back tested" results, which is not ideal as these can be 'curve fitted' to suit the data. You really want one that has a track record of real live trades, using real money, and preferably one where they have had clients using it it in real time for a reasonable period of time.  They are very handy for those that are time poor, who still want to use expert guidance but are happier to just pay a flat annual or monthly fee for the signals and place their trades themselves, rather than pay fees to a managed account.

 

FX Trading software :

This is software that sits on your computer desktop, and provides you with entry and exit points of FX positions, and is usually based on a trading algorithm, or other technical analysis signal formulae. This will either be stand alone software where you then manually enter the trade on any broker platform you like, or it will integrate with the MetaTrader (also known as MT4) platform, which enables auto-trading where the trades happen for you without your manual intervention. A number of brokers (but not all) offer MetaTrader as a trading platform.

 

FX Trading systems :

This is generally a DVD set of self paced education material around the FX market, and also often includes some sort of manual indicator trading system to provide you with buy and sell signals. Beware of basic education material that costs a lot of money. There is plenty of freely available information of Forex on the internet.

 

FX Managed Accounts :

As the name suggests, Managed Accounts are where a 3rd party trades your account for you. This (you would hope) is an expert FX trader with a robust, logical trading methodology, and a solid REAL track record with good steady gains and a LOW DRAWDOWN history. THIS IS NOT EASY TO FIND. Due to the leveraged nature of FX trading, this can be real hit and miss, and there have been many instances of investors' entire accounts being wiped out in FX managed accounts, even those that had a good track record. Many of these accounts will charge a management fee and a performance fee (average tends to be around 20 - 25% of profits). An alternative to this that has appeared lately is the availability of system providers directly to you brokers account, where they provide signals to your broker, and the brokers place those trades without you needing to be involved (although you need to provide permission at the setup). The big "sell" with these is that there are no management or performance fees. The signal providers make their money from receiving a clip of the brokerage from the broker. Again, don't go for "back tested" results. Look for those that have been getting good results in a live trading situation using real live money with real live clients for a substantial period of time, with low to moderate leverage and a fixed number of open positions that they can take at any one time. And most importantly, if your going to take the plunge with one of these providers, start off very very small and with a very small % of your asset allocation until you've proven to yourself it actually works. And be very very very careful with sending your money to an offshore company that is not a major regulated institution.

 

For information and reviews on all the other types of FX service providers above, go to www.forexpeacearmy.com
Note that the FPA reviews are done on mostly international companies. Very few are Australian so be very careful.