Foreign exchange or forex is greatly dependent on the global currency market, which is completely decentralized. This implies that anyone in Singapore can access the currency market anytime, anywhere, and perform transactions. Forex trading involves trading a currency for another to earn a profit. Trading in foreign currencies can produce massive gains since the value of a particular currency in relation to another never remains fixed. They fluctuate depending on market demand and supply, geopolitical factors, and other monetary policies.
Unlike other forms of trading that take place on a centralized physical exchange, forex trading is a digital network that is performed over the counter (OTC). This allows the forex market to remain active 24 hours a day, five days a week, for traders to make their trades at their convenience. Any trader within the country has the power to exchange foreign currencies using top forex brokers in Singapore. Even foreigners can exchange their currencies to use the national legal tender to buy other currencies, goods, or services.
Understanding the Concept of the Forex Market
The global forex market allows entities like individuals and banks to buy, sell, and exchange currencies for speculative and hedging purposes. The market is the world’s largest financial market, made up of commercial companies, banks, central banks, hedge funds, investors, retail, forex brokers, and investment management firms.
A few basic terminologies of the forex market include –
- Currency Pair – A currency quotation against another is known as a currency pair, represented as AAA/BBB. AAA is the first/base currency, and BBB is the second/quote currency.
- Exchange Rate – The rate at which a trader exchanges a currency for another is called the exchange rate. For instance, EUR/USD = 1.2 implies that 1 EUR (base currency) costs 1.2 USD (the quote currency).
- Quote – The market price always consists of two figures – bid/selling price and ask/buying price – called the quote. For, e.g., 1.2345/1.1234.
- Ask Price – The price written on the right-hand side of the quote is called the asking price or offer price. It is the price at which traders buy the base currency.
- Bid Price – The price written on the left-hand side of the quote is called the bid price. Note that the bid price is always lower than the asking price, and the difference between the two is the spread.
- Spread – The difference in pips between the ask and bid prices is called the spread, which represents the brokerage service cost that replaces transaction fees.
- Pip – The pip is the smallest price change of any exchange rate. For instance, if a currency pair EUR/USD increases from 1.250 to 1.251, that is a one-pip movement.
Major currency pairs are heavily traded, driving the global forex market. Mainly there are four major currency pairs, including EUR/USD, GBP/USD, USD/CHF, and USD/JPY. Apart from these four major actively traded currency pairs in the forex market, the other so-called commodity currency pairs include NZD/USD, USD/CAD, and AUD/USD.
Currency pairs are affected by various factors which make them extremely volatile in nature. The most common factors that affect the constantly-changing currency pairs include inflation and interest rates, current account deficits, terms of trade, government debt, economic performance, speculation, recession, and other geopolitical factors.
In forex trading, there are mainly two schools of thought, fundamental analysis and technical analysis, that approach the market with the same objective but at opposite ends of the spectrum. While fundamental analysis evaluates currencies by measuring their intrinsic value and studying them from the overall economic health, technical analysis identifies the best opportunities by considering statistical trends and a currency’s trade volume and price movements. Fundamental analysts focus on historical and current data, whereas technical analysis determines the future price of a currency using charts to identify patterns and trends from past data only.
Getting Started with Forex Trading
The best forex broker in Singapore is waiting to win over businesses. Traders may feel bombarded with an overwhelming list of forex broker offerings. There are four aspects to consider while choosing the right forex broker in Singapore –
- Choosing a reliable forex broker – The first thing that every trader must check is the reputation of their chosen forex trading platform. Flashy websites do not guarantee safety as they are mostly unregulated without any proper security measures.
- Understanding trading platforms – A forex trading platform is a trader’s portal to the forex market. They offer fundamental and technical analysis tools required to make forex trades. They should offer various features such as customization options, automated trading options, order entry types, strategy builders, trading alerts, and backtesting features. Moreover, many forex brokers in Singapore also offer free demo accounts so that traders can familiarize themselves with the platform’s features and functions before opening or funding their trading accounts.
- Order types available – Almost all forex brokers in Singapore provide basic order types such as market orders and pending orders. However, traders must also ensure that other commonly used order types are also available on their chosen forex broker platform, such as limit orders, stop-entry orders, stop-loss orders, and trailing stop orders.
- Leverage and margin – Forex traders may access leverage depending on the chosen forex broker. Leverage mostly works in favor of the traders with winning positions since profit potential is substantially enhanced. However, using leverage aggressively can destroy a forex trading account as the loss potential can also be magnified. Leverage is made available in the trader’s margin account. For instance, using leverage of 50:1 allows traders with an account size of $1000 to hold a trade position valued at $50,000.
Developing a Trading Plan
Building a trading plan requires the following five steps –
- Setting trading goals – To make successful forex trades, traders need to define goals that should be measurable, attainable, time-bound, specific, and relevant. Before entering a trade, it is also recommended to set risk-reward ratios and realistic profit targets and assess them regularly to remain on track.
- Trade Style Identification- Forex trading mainly has four styles: position trading, swing trading, day trading, and scalping. Trading style should be chosen based on the trader’s risk appetite and personality if they are willing to commit themselves to trade.
- Choosing a suitable trading strategy – A trading plan and a trading strategy are not the same. A well-designed trading strategy defines precisely how one enters or exits their trades. For instance, a simple strategy would include buying BTC when the value reaches $5000 and selling at $6000.
- Money management strategy – Traders must look at their bankroll to see how much investments they can afford for forex trading. They must never risk more than what they can afford to lose.
- Backtesting and paper trading – Backtesting and paper trading are two important techniques for risk assessment and algorithm verification. The backtesting tool validates a trading thesis by assessing it based on relevant past data. Whereas paper trading or forward testing involves taking parameters of algorithms and applying them to real-time data. Both mechanisms significantly minimize any possibility of over-optimization that may corrupt the trades.
Executing Trades and Managing Positions
- Entering and exiting trades – To enter or exit forex trades, traders require a well-thought-out and confident plan to find the right points that bring profits. While there are many ways to implement entry and exit strategies, here are a few elements to consider – time frames, working with the trends, entering and exiting the market on time, using signal services, using stop limit and stop loss orders, and testing entry and exit strategies.
- Risk management – Managing risk is an important part of forex trading as it involves controlling, identifying, and assessing threats to potential earnings. Having an effective risk management strategy helps a trader consider a variety of risks, such as interest risk, leverage risk, volatility risk, counterparty risk, and more.
- Using stop-loss and take-profit orders – Using stop-loss and take-profit orders allow traders to limit losses and maximize profits in the forex market. Stop-loss order limits the price entered by the traders. Once the price limit is attained, the open trade position closes to prevent losses. Take-profit order also works in the same way. However, it automatically closes a position when a profit target is attained to lock in the profits.
- Scaling in and out of positions – Scaling is a trade management technique that allows traders to reduce potential losses and maximize profits even when future price movements are uncertain. Scaling in and out refers to entering and exiting a fraction of the trades to lock in profits and leave positions to take advantage of future price trends.
Advanced Topics in Forex Trading
- Using indicators and oscillators – Forex traders can use trend indicators to discover short-term oversold or overbought conditions. Oscillators can also be used to construct low and high bands between two extreme values and build a trend indicator that fluctuates within these ranges.
- Trading psychology and discipline – Trading psychology involves the mental state and emotions of the traders that help dictate failure or success in trading currencies. It represents different aspects of a trader’s behavior and character that influence forex trades. Discipline is also another critical aspect of trading psychology since a trader’s implementation of such aspects is critical to how their trades turn out to be.
- News trading and event risk – Forex traders must familiarize themselves with major event risks that substantially affect major foreign currencies. Note that traders are essentially trading the news since it has the ability to increase short-term volatility. Hence, traders must trade news that has the best-market-moving potential for the forex markets. Keeping an eye on the upcoming event risk can help traders avoid being on the wrong side of the forex market.
Forex trading in Singapore has become popular for two main reasons – hedging and speculation. People are making money off the fluctuations in currency prices and taking full advantage of the volatile forex market. Currencies with high liquidity tend to have a ready market and hence, exhibit predictable and smooth price action in relation to external events. A clear understanding of the different concepts of forex trading, such as fundamental macroeconomic analysis, technical analysis, currency pairs, and exchange rates, may help novice traders become more successful and profitable in their field. All in all, it is important to note that forex trading in Singapore is similar to any other business, and no trader can get rich overnight.