Forex or FX trading is an over the counter market where forex currencies are traded; most of these transactions are short term, conducted through brokers. One significant difference in trading Forex is that it isn’t bound by any exchange rules and regulations, allowing traders greater flexibility in their money management techniques.
Forex trading takes place on margin accounts. With a margin account, you can trade with more money than would otherwise be possible by providing the broker with a guarantee (usually your signature) that you will repay losses sustained during trading.
Like other speculative markets, Forex prices fluctuate dramatically in response to economic changes and sentiments of traders based on real-world events. Since these factors can be unpredictable at times, especially when they happen suddenly, Forex traders can make or lose large amounts of money in very short periods.
It is a method of borrowing money from a broker to fund an account. This allows you to turn a relatively small deposit into a more significant amount of buying power so long as the market moves in your favour enough for the equity and margin levels to remain stable.
For example, I have $50k and would like to trade the EUR/USD. A good broker will offer me leverage up to 100:1, meaning that my capital can be used as collateral for my trades ten times over. If the market moves three pips against me, my trade has lost $10, but as my initial investment was just 1% of my collateral, I am only down 1% of my total equity.
This is also the risk with CFDs, so you will need to decide how much leverage is appropriate for your experience level. Less experienced traders might feel more comfortable with 50:1 whilst a seasoned veteran would be happy with 100:1 or more. As mentioned before, it’s important to remember that our available capital caps the most we can win on any one trade and that losses follow a similar pattern.
As Asian markets open and close later than most European and North American markets, it is possible to use lower margin requirements, something not usually possible during opening hours when dealing with an EU or North American broker. You still need to make sure your broker is regulated; this ensures you are trading with a reputable company and that their servers meet industry standards for uptime, which will affect the quality of your trading experience.
As well as increased leverage, Asian markets also often offer an advantage when it comes to spreads (the difference between the buy and sell price). This means you can trade with tighter margins, creating more profit from each pip movement in price. For example, if EUR/USD moves one pip against me at 9 am in London, yet I can gain only three pips by using my 10:1 margin whilst in Hong Kong where market hours coincide with mine, I might be able to gain 4-5pips.
Asian brokers also often have the added benefit of offering hedging techniques that can help protect your positions during adverse price movements, so you can still trade with tight margins even if the market moves against you. You can read more about this defensive technique here.
leverage has its advantages and disadvantages just as any tool would, but it is essential to remember that there are multiple benefits to trading Asian markets for CFDs. The lower leverage available means the risk is controlled, whilst tighter spreads and favourable market hours can increase your ROI or yield. Beginner traders are advised to use a reputable online broker from Saxo Bank and trade on a demo account before investing real money. For more information, read this article and contact Saxo Bank today.