Foreign exchange (FX or forex) trading is when you buy and sell foreign currencies to try to make a profit. Even the most skilled and experienced traders have difficulty predicting movements in currencies.
How forex trading works
Foreign exchange trading attempts to make a profit by predicting the value of one currency compared to another.
FX trading is normally conducted through 'margin trading'. A small collateral deposit worth a percentage of a total trade's value is required to trade.
Trading in international currencies requires a huge amount of knowledge, research and monitoring. Before you put your money on the line, get independent advice from a licensed financial adviser.
Margin FX trading is one of the riskiest investments you can make. It raises the stakes further by letting you trade with borrowed money, but you'll be responsible for all losses.
Contracts for difference (CFDs)
Contracts for difference (CFDs) are a way of speculating on the change in value of a foreign exchange rate. CFDs can also speculate on a change in share price or a market index. You're not buying the underlying asset, just speculating on the price movement.
CFD leverage is like trading with borrowed money. The deposit (or 'margin') you give to the provider is a small part of what you borrow to invest.
A CFD contract is legally binding. If the market goes against you, the CFD provider:
- will ask you to pay extra money at short notice to keep your CFD position open (a 'margin call'). This may lead to further losses
- may close out your CFD, for whatever it's worth at the time. You may lose all the money you invested
Risks of forex trading
- Small market movements can have a big impact. Most FX trading products are highly leveraged. You only pay a fraction of the value of your trade up-front, but you are still responsible for the full amount of the trade.
- Exchange rates are very volatile. They tend to move around a lot even within very short periods of time. There are significant investment risks as currency fluctuations may move against you, causing you to lose money.
- Currency markets are extremely difficult to predict. Many different factors affect exchange rates.
- Limited protection from risk management systems. Stop loss orders will only cap your losses. You may also pay a premium price to guarantee your stop loss order.
- Forex scams and fraud. Offers and advertisements that sound too good to be true probably are. Read what the US Commodity Futures Trading Commission has to say about foreign currency trading fraud.
- Forex provider risks. If your FX provider becomes insolvent, you may not get your money back.
- Trading delays can severely affect results. You may not be able to make trades when you'd like to, because of a lack of liquidity in the market, execution risk, or computer system problems.
Forex trading software programs, seminars and courses
Forex software programs are available for forex trading. They may claim their programs can let you know when to make trades. But no person or program can ever accurately predict movements in foreign currencies.
Be wary of companies promoting a particular product that gives you access to better exchange rates or easy money. They may let you trial their trading platform for free at first. This is usually just a teaser for you to buy the software or platform.
Any provider offering an add-on service like software, trading robots or seminars must hold an appropriate AFS licence or authorisation from an AFS licensee for the service. Before you use a service like this, check they are licensed or authorised through ASIC Connect’s Professional Registers.
A basic FX trading course or seminar won't give you enough information to start trading.
Do your own checks on forex providers
Different forex products involve different risks. Read the product disclosure statement (PDS) carefully before investing.
Check that the forex provider has an Australian Financial Services (AFS) Licence. ASIC Connect's Professional Registers will tell you if they do.