Foreign exchange trading (forex trading) involves buying and selling foreign currencies with the aim to profit from currency movements. One strategy to profit from this is to carry trade. Learn about carry trade in our guide.
When compared to other financial markets like bond or stocks, forex markets are the largest globally turning over $6.6 trillion daily and valued a staggering $2.409 in total. While many presume trading forex (foreign exchange) is only accessible to institutional investors, forex brokers and online trading platforms mean there are few barriers to entry for retail traders.
When fx trading, you are simply exchanging one currency for another at an agreed upon price. When you start trading with an online broker, rather than trading physical currency pairs, you will trade contracts for difference (CFDs).
Contracts for difference (CFDs) are a type of derivative product that allows you to speculate on an instrument’s price movements, without actually buying or selling the physical underlying asset. A major benefit when trading CFDs compared to the underlying physical asset is that you can use leverage, magnifying your exposure beyond your initial investment.
While different brokers offer different CFD product ranges, most top forex brokers will provide access to a combination of the following asset classes:
As an Australian trader looking for a forex broker, there are key factors to consider and understand. There are hundreds and broker and trading platform options that suit different styles of trading and levels of experience, therefore it is vital to know what CFDs and trading tools you require, along with the trading strategies you plan to execute. Key considerations should include:
Forex brokers fall into one of two major categories being dealing desk brokers (known as market makers) or no dealing desk (NDD) brokers. Different pricing and commission fee structures are available with the two types of brokers, meaning it is important to know how your broker is executing orders.
Via a dealing desk, market makers use their own internal liquidity to fill your orders while setting their own bid-ask prices. As discussed more in the next section, market maker brokers offer commission free forex trading. Rather than paying an additional commission fee on top of the spread, market makers widen their spreads to compensate for their brokerage services. Some forex traders believe market makers lack transparency, as they are the counterparty to your trades and therefore profit off your losses.
NDD brokers use either straight-through processing (STP) or electronic communications network (ECN) technology to execute orders, with some brokers using a combination of the two. With no dealing desk interference, NDD brokers pass your orders directly onto external liquidity providers that fill your order and are the counterparty to your trade. As multiple top-tier liquidity sources are utilised, NDD brokers can offer ultra-tight spreads and fast execution on par with an institutional grade trading environment.
The key distinction between ECN and STP brokers is the control the broker has over the external liquidity sources. ECN brokers have no control over the liquidity provides they use, while STP brokers retain some control.
The two types of brokers suit different levels of trading experience and trading strategies. If you are a beginner trader wanting a simple fee structure, market makers offer a soft entry into forex trading. Yet, if you are an experienced trader wanting to execute day trading, scalping or algorithmic trading strategies, NDD brokers offer tighter spreads and faster execution speeds.
Depending on whether your broker is a market maker or NDD broker, you will have the option of two main pricing structures when trading forex.
For example, Pepperstone offer two account types, a Razor account with commission spreads and a standard account with no commission fees. Likewise, IC Markets offer a Raw account and a standard account.
Often referred to as ECN accounts, commission trading allows you to access ultra-tight spreads that can be as low as 0.0 pips thanks to NDD execution. As you are trading spreads sourced directly from external liquidity providers, for each trade you pay a round-turn commission fee for each 100k traded.
As NDD brokers use different liquidity providers, average spreads vary. As shown below, brokers like Pepperstone and IC Markets provide access to the tightest ECN spreads. Overall, IC Markets offer the lowest average spreads for the major currency pairs shown below, such as the EUR/USD (Euro vs US Dollar) and the AUD/USD (Australian Dollar vs US Dollar).
Data taken from broker website. Accurate as at 02/04/2021
Commonly called classic or standard accounts, commission-free account types are ideal for beginner traders wanting a simple pricing structure. Both NDD and market maker brokers offer this account type where you pay no additional commission fees on top of the spread.
While ECN spreads can be as low as 0.0 pips + commission, spreads with no commission fees mostly start from 1.0 pip. As shown below, IC Markets provides access to the tightest spreads for most forex pairs, averaging 1.40 pips for the GBP/USD and 1.10 pips for the EUR/USD.
Compare All Spreads >>
As well as the two main pricing structures and accounts types, brokers may offer the following account options:
While there are many trading platforms available, most retail forex traders will use one of three, being MetaTrader 4, MetaTrader 5 and cTrader. The mainstream platforms are offered by various brokers and provide a range of trading tools to enhance your strategies. Alternatively, certain brokers offer proprietary trading platforms, as well as additional mainstream options.
MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader are the three most popular trading platforms globally thanks to their advanced algorithmic trading tools. You can achieve full automation using algorithmic features, known as Expert Advisers on MT4 and MT5 and cBots on cTrader. You can either write your own trading robots or download tried and tested EAs and cBots online. Other features include:
There are numerous brokers that offer proprietary platforms unavailable elsewhere. While these platforms may offer trading tools well-suited to those new to trading forex, most lack the advanced technical analysis and algorithmic features that MT4, MT5 and cTrader provide. Examples of broker’s with popular proprietary trading platforms include:
Plus500: As a market maker, the broker’s proprietary platform offers premium risk management features such as guaranteed stop loss orders.
Markets.com: The broker developed Marketsx with exclusive sentiment trading tools along with useful technical and fundamental analysis features. The trading platform offers an extensive selection of financial products to trade, with 2,200 CFDs available.
eToro: A social-copy trading network and platform that allows you to automate trading through account mirroring features. You can copy the trading strategies of other forex traders as well as interact and learn from them.
As foreign exchange markets experience significant volatility combined with the leverage available to retail traders, trading forex comes with a high risk of losing money. The rules and regulations surrounding forex trading vary between country, with brokers offering different risk management tools to assist traders.
While in some countries the local regulator also acts as the Central Bank (i.e. Singapore), Australia’s financial authority operates as a seperate supervisory agency that provides independent advice regarding forex trading rules in Australia.
Aussie brokers are overseen by the Australian Securities and Investments Commission (ASIC) and must hold an Australian Financial Services License (AFSL) to operate in Australia. From April 2021, ASIC is introducing much stricter forex trading regulation that follows the standard in the UK (FCA) and Europe (ESMA). This is mainly due to the high risk that comes with trading leveraged products and with the aim of reducing the number of distressing financial situations caused by losing money when forex and CFD trading.
Currently, ASIC regulated brokers are required to provide basic investor protection policies such as segregated client funds, product disclosure statements (PDS) and website disclaimers. Yet, from April 2021, Australian forex traders will be protected from large losses through:
To help you reduce the high risk that comes with forex trading, brokers provide risk management tools such as demo accounts and order types.
Demo accounts allow you to practise trading in real-time market conditions, in a risk-free environment. With virtual account balances, you can place orders in foreign exchange markets, allowing you to test out trading strategies, new Expert Advisers, and much more.
To protect yourself against large fluctuations that are common with exchange rates, different order types can be used to maximise profits while minimising losses. Most brokers offer basic order types like stop losses, trailing stops and limit orders, while premium orders such as guaranteed stop loss orders (GSLO) are only available via market maker brokers.
Assume a trader believes that the value of the AUD will appreciate or rise against the value of the YEN. An alternative way of thinking about this situation is that the YEN will devalue in relation to the AUD.
They buy the AUD/YEN at 1.1500 and purchase $6,000 worth of currency. Later that day, the price increased to 1.1550. The trader is up $30 (6000 * 0.0050). If the price dropped to 1.1430, the trader would be losing $42 (6000 * 0.0070).
Due to the fact that currency markets are on the go twenty-four hours a day, experienced traders may choose to hold their position in a currency pair overnight. Their chosen broker will allow for the rolling over of their position, with the individual ultimately receiving either a debit or a credit, determined by the interest rate differential between the AUD and YEN. If the interest rate of the AUD is higher, post roll over the trader will receive a credit, however, if the opposite was to be true, and the interest rate of the YEN is higher, the trader would receive a debit.
The concept of rollover can determine the outcome of many trading decisions. This is specifically true when traders have the intention to hold positions for the long term. The other point of strong consideration is the varying differences in interest rates. If there are large variances, this can result in significant credits or debits on a daily basis. If chartered incorrectly, this can erode the generation of profits or even worse, increase losses on a specific trade.
As mentioned above, a forex example would be incomplete without a consideration of major forex risk being leverage. Currently, brokers in Australia can provide leverage with a range varying up to 500:1. In this example, let us imply that the trader used the leverage of 50:1. If using 50:1 leverage, although the value of their trade will be worth $5,000, this is not the amount of money they will be required to invest. They will only need a substantially more minute amount of $100. As long as the trader has $100 and 50:1 leverage, they will be able to trade with $5,000 worth of currency.
Making a profit of $30 off one trade whilst knowing that the trader only needs $100 (this can be even less if more leverage is deployed) accurately displays both the power and the downside of leverage. However, if a trader does not acknowledge the risks involved when it comes to leverage, the capital in their account will dwindle quickly. A list of courses can help further explain the concept of forex.
When trading forex and CFDs, it is important to be aware of the various factors that affect an asset’s price, such as changes to economic conditions or inflation. If you are new to trading and unsure of the significant macroeconomic factors to follow when trading, broker’s like Pepperstone offer excellent educational resources. For example, the video below explains 5 key macro fundamentals to consider when trading forex and CFDs:
Brokers offer different functionality, latency and charting that are critical to trading on margin and the overall trading experience. The forex broker selected will set the trading platform options available, financial market and features.
Pepperstone is a Melbourne based ECN forex broker allowing trading directly with liquidity pools. Their main features include:
Pepperstone offers the most popular forex trading platforms, low spreads and commissions, high leverage and execution speeds are why they are recommended for intermediate to expert forex traders. You can compare Pepperstone to other ASIC regulated firms on the Australian forex broker comparison table.
View Pepperstone Review >>Visit Pepperstone >>
GO Markets is a Sydney based forex broker with a tiered service approach.
The brokers’ core features are:
GO Markets is an excellent option but only for those that opt for their new GO Markets PLUS account. This account has the lowest fees with raw spreads and Australia Dollar $3.00 per side commission. The issue is that regularly the minimum deposit is $10,000 making this broker only suitable for high-volume currency traders. If you’re a high-frequency trader, then you should consider this forex broker.
View Go Markets Review >>Visit GO Markets >>
easyMarkets is a Cyprus-based forex broker regulated by ASIC as well as other financial authorities around the world.
Their main strengths are:
easyMarkets offering of transparent trading fees, combined with unique risk management tools, makes them the ideal forex broker to beginner forex traders of those with a low-risk profile. They focus on those new to trading but are not the best in the category as you can view on the forex broker beginner page.
View easyMarkets Review >>Visit easyMarkets>>
Plus500 is a publicly listed company that has an office in Sydney.
The forex broker offers to trade with:
Plus500’s key strength is their offering of financial products outside of forex such as shares, though fees for all asset classes are high. If the brokerage is important to you, then view the low fee forex broker comparison page.
Their CFD trading platform is unique to the other Australian forex brokers, which are both their strength and weakness if you want to change brokers at a later stage.
View Plus500 Review >>Visit Plus500 >>
*Your capital is at risk ‘76.4% of retail CFD accounts lose money’
Other popular ASIC regulated brokers including Markets.com, IC Markets, and ThinkMarkets.
Justin Grossbard has been investing for the past 20 years and writing for the past 10. He co-founded Compare Forex Brokers in 2014 after working with the foreign exchange trading industry for several years. He also founded a number of FinTech and digital startups including Innovate Online and SMS Comparison. Justin holds a Masters Degree and an Honours in Commerce from Monash University. He and his wife Paula live in Melbourne, Australia with his son and Siberian cat. In his spare time, he watches Australian Rules Football and invests on global markets.