Interested in forex trading? Here's how to start

This article first appeared on Yahoo Singapore.

Key Takeaways

• 1.  Forex trading is similar to converting one currency into another, except with the intention of earning a profit.
• 2.  Forex markets are open 24 hours a day from Monday through Friday. They close on Saturday 11am till Monday 10am (Singapore time).
• 3.  The forex market is also highly liquid. This means forex transaction costs, called the spread, tend to be low.

The year is coming to a close, and 2022 has certainly been one that’s marked by volatility and inflationary pressures, exacerbated by supply shocks arising from the Russia-Ukraine conflict. Rising energy and food prices, among others, have seen central banks all over the world turning to policy tools to try to rein in inflation.

In Singapore, overall inflation matched a 14-year high recorded in June 2008. To help manage increasing inflation and the rising cost of living, the Monetary Authority of Singapore (MAS) has tightened monetary policy five times within a year – the first move was in October 2021, and the latest such action was in October 2022.

In its latest half-yearly monetary policy statement in October 2022, MAS noted that the global economy will likely face high inflation and lower growth next year, and core inflation is expected to remain elevated over the next few quarters¹.

What does this mean for investors? For one thing, the strengthening outlook of the Singapore dollar could mean opportunities for investors looking to get into forex trading.

Read more on how to invest with confidence during a recession.

What is forex trading?

Simply put, foreign exchange is the conversion of one currency into another.

Think of the money changers you visit to convert currencies when traveling abroad – with forex trading, you’re essentially engaging in a similar activity but with the intention of earning a profit. When you purchase one currency while selling another, you can potentially realise a profit if the exchange rate moves in your favour or incur losses if the exchange rate moves against you.

Forex markets are open 24 hours a day from Monday through Friday. They close on Saturday 11am till Monday 10am (Singapore time).

An example of how Forex trading works

Forex trades are expressed as currency pairs, which can look something like this:

• EUR / USD
• USD / JPY
• GBP / USD
• AUD / USD

The currency on the left is refer to as the “base currency”. The currency on the right is referred to as the “quote currency”.

The exchange rate of the currency pair indicates how much of the quote currency (the one on the right) is required to buy a single unit of the base currency (the one the left). For example, if the exchange rate for USD / GBP is 0.86, then it would cost 0.86 British pounds to buy one US dollar.

If you believe the base currency (USD) will rise against the quote currency (GBP), you would buy the base currency and sell the quote currency, i.e. go long on USD / GBP). If you believe the opposite is true, you would go short on USD / GBP.

Depending on whether your view pans out, you will see profit or loss based on the degree of the movement. For instance, if you went long on USD / GBP, then the higher the US dollar rises against the pound, the higher your profit.

This is a simplified example of the spot market; one of the most popular ways to trade forex.

There are other methods such as the forward market and futures market. These markets are based on parties setting an agreed-upon price for a currency, at a future date. In this form of Forex trading, you deal with contracts, which feature the right to buy or sell certain currency types at the given conditions, rather than dealing with actual currencies themselves.

However, these are advanced forms of forex trading, and may be better suited to seasoned forex traders.

Why trade forex?

In terms of when to trade, the forex market is open 24 hours a day from Monday through Friday. The market close on Saturday 11am till Monday 10am (Singapore time).

The forex market is also highly liquid. This means forex transaction costs, called the spread, tend to be low.

Though not all forex trading platforms offer leveraging, it is possible to avail of comparatively high leverage, typically up to 100:1. This means that if you wanted to, you can trade up to $100 of currencies for $1 of actual cash that you hold. Leveraging potentially allows you to amplify your gains and realise larger returns. The converse also holds true – leveraging could also mean amplified losses and therefore leverage trade should only be entered into only after careful consideration – including of one’s appetite for loss.

Forex trading requires discipline and risk management

The advent of the Internet has made forex trading accessible to many. However, while it can be relatively easy to start trading forex, it requires self-discipline.

This means implementing strategies such as the use of trailing stop loss orders and using practice accounts to prepare yourself.

Some forex trading platforms, such as Citibank Online Foreign Exchange (eFX)², provide you with the tools to do this. On eFX, you can use the Citi Mobile^® App to set up instructions to automatically buy or sell when a currency reaches a target rate, or receive alert messages when your various currencies are at the right rate to buy or sell.

Citi’s eFX also allows you to convert currencies on-the-go with the Citi Mobile App or Citibank Online. You can personalise your watchlist with live-streamed FX rates.

Avoid emotional investing or trading

The emotional aspect of forex trading also cannot be ignored. The high volatility of the forex markets is not for everyone. You also cannot allow your emotions to override your strategies – this means avoiding actions such as “doubling down” against your plans, because of an unexpected lucky streak.

Forex traders should also keep abreast of current events, such as geopolitical tensions or trade deals, as these could have an impact on currency rates. Even seemingly minor news events – such as the opening of a new shipping port in a distant country – might end up having a significant impact on forex markets. The Citi eFX platform provides FX polls to help you identify market consensus; these help you to make better-informed trading decisions. Citibank’s eFX platform also has the latest FX insights, data and charts to help you trade.

Additionally, with a Global Foreign Currency Account, you will be able to enjoy free withdrawals at any Citibank ATMs worldwide with Citibank Debit Mastercard. There will also be no surprises on hidden or third-party fees when you spend overseas or shop online.

While nothing in forex – and in life – is 100 per cent certain, good traders try to minimise the role of luck, by doing their homework and staying on top of their trades.

New to investing? Read our beginner’s guide to investing, or learn how you can save and invest from as low as S$100 per month.

Disclaimers

Sources

¹ MAS Monetary Policy Statement – October 2022. Outlook. Monetary Authority of Singapore. (2022, October 14). https://www.mas.gov.sg/news/monetary-policy-statements/2022/mas-monetary-policy-statement-14oct22

² Please refer to the Citibank eFX Disclaimer here: https://www.citibank.com.sg/wealth-management/investments/investment-products/foreign-exchange/

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