What’s Forex Trading, And How To Get Started In Singapore

Forex trading is volatile, fast-paced and risky, but some traders have found great success with it. Here’s what you need to know before getting into forex trading. 

As the largest market in the world - larger than even the stock market - the forex market has reached daily trading volumes as high as US$6.6 trillion.

Given that the typical forex trade is completed in minutes, it’s not hard to imagine the fortunes that have been made (and lost) on the forex trading floor. 

To be clear, forex trading is not to be taken lightly. But for the curious, here’s what you need to know about forex trading.

What is forex trading 

Forex (fx) is short for foreign exchange. It involves trading one currency for another. Like all trading activity, the motive in forex trading is to make profit. 

Trading forex can produce profits because the value of currencies relative to each other is not fixed - they can move up or down depending on factors like demand, monetary policies and other geopolitical factors.

Rather than a centralised exchange, the forex market is a digital network made up of banks, brokers, institutions and traders. This digital nature of the forex market also means it’s easy to trade forex - you can do so simply with an online account. 

The forex market is active 24/5, allowing you to make trades at your convenience.

Because the instrument being traded is currency, another characteristic of the forex market is its highly liquid nature.

How does forex trading work?

In essence, in a forex trade, you are making a bet about the relative strength (or weakness) of one currency against another. If you bet correctly, you’ll make a gain; if not, then a loss. 

Forex trades always involve selling one currency for another. As such, trades always take place around a pair of currencies, for example USD/EUR.

The first currency is known as the “base currency”, which is the currency you are buying. The second currency is known as the “quote currency”, and is the currency that you are selling. 

If the price of the USD/EUR pair is, say, 1.3456, then 1 US Dollar is worth 1.3456 Euros.

If the US Dollar strengthens against the Euro, this means 1 US Dollar is worth more Euros, which means the price of the pair would go up - say, 1.3476.

If the US Dollar weakens against the Euro, this means that 1 US Dollar would be worth less Euros. In this case, the price of the pair would go down - say 1.3406.

In other words: 

Let’s see how it all works with an example.

Trader Charlie thinks that the US Dollar will rise in value against the Euro (which means, the price of the USD/EUR pair will go up). 

He thus takes a long position on the pair. Here are the possible outcomes for Charlie:

However, if Charlie thought the US Dollar would instead weaken against the Euro (or, put another way, the Euro strengthens against the Dollar), he would instead take a short position on the pair. 

Here are the possible outcomes in this case: 

(For a quick recap on short and long positions, read our Options Trading guide.)

Reasons to trade forex

#1: Forex trading is fast moving

Due to the highly volatile nature of currency prices, forex trades typically move very fast. Most traders will close their positions the moment they turn a profit, and are unlikely to hold on if their trade goes against them.

This means that fx trades are usually made and completed at a very fast rate, which may be appealing to certain types of traders. 

#2: Can start trading with little capital

You can start trading forex with as little as S$100, which is attractive to those with little capital. In this sense, forex trading has a lower barrier to entry than stock trading, which requires a far higher sum of capital in order to buy top-rated stocks. 

#3: Trades may be made on high leverage

Trading on leverage isn’t limited to forex. However, leveraged trading is very common among forex traders, especially among those seeking to quickly amplify their profits. 

Forex trades may be made on leverage as high as 50x. While this can generate a large amount of profit, losses are similarly multiplied, making leveraged forex trading a highly risky activity.

Potential pitfalls of forex trading

#1 The volatility is not for the faint-hearted

Turn on your favourite currency conversion app and you’ll see the prices changing from minute-to-minute. That’s how volatile forex trading can be. 

Currency prices change throughout the day. Now imagine you’ve opened a S$10,000 position, waiting for the price to fall. However, it seems like the price is going against you, creeping upwards with every tick of the clock. 

What would you do? Hold on to your position in the belief that the price will swing your way? Or close your position to prevent taking an even larger loss?  

Btw, while there is technically no limit to how long you can hold your position, you may incur overnight fees and other charges as you do. So, you know, no stress!

#2 Leveraged trades are common 

Forex trading is a highly emotional game, and even those who pride themselves on having nerves of steel will find themselves sorely tested. 

Part of the temptation stems from the common and widespread use of leverage, which basically means trading on borrowed money. Leverage allows you to boost the amount of money in your trade, even if your starting capital is a fraction of the amount. 

With the larger sum, profits are boosted, allowing traders to quickly accumulate a large gain. However, the opposite is also true. Leverage will similarly amplify your losses, which means a bad trade can wipe out all your profits and capital, and even put you in debt. 

#3 Success takes work, and luck

Let’s be clear. Forex trading is simple on the surface, but if you want to be able to make the right calls, you’ll need to spend a lot of time and effort to study the underlying factors that affect currency prices.

This entails keeping up with current affairs, and having a thorough knowledge of history and economics. Being able to understand highly technical subjects like monetary policies and to predict socio-economic trends will also be helpful. 

Calling it a complex task is an oversimplification. 

And even then, there’s no way to know for sure if you’re making the right call. The outcome of your trade could turn on a whim, depending on which way Lady Luck decides to go. 

Pros and cons of trading forex

Forex trading for beginners and how to start trading in Singapore

#1 Set up a forex brokerage account

All forex trades have to be conducted over-the-counter, so the easiest way to trade forex is to do so with an online broker. 

Popular brokers offer a wide selection of fx pairs, competitive trading fees, well-designed trading interface and convenient funding options. 

Some good quality brokerages also offer beginner guides, news and educational material that can help increase your chances of success. They can also offer demo accounts for you to test out their platform to see if the interface, speed and overall user experience is something you enjoy. 

Head on over to our coverage of the best forex brokers in Singapore to help you choose one that is best suited to your needs.   

#2 Learn more about forex trading and the strategies to execute

Trading forex is different from trading stocks, ETFs or even cryptocurrencies. As you’re trading one pair against another, the factors that affect the price of the forex pair you’re trading differs. For example, factors that affect forex markets include interest rates, inflation, tourism, political stability. economic performance and more. 

To prepare yourself to trade forex, you’ll need to read up more about how forex works, the amount of leverage used and how to navigate the forex broker’s platform. You will also need to figure out your risk appetite and how much money you plan to trade with. 

The price of forex pairs also moves very quickly, in short time frames, making forex trading strategies very different from trading other asset classes. Popular trading strategies include trend trading, scalping, swing trading, news trading and more. 

#3 Stay on top of your trades 

As with all investments made, you should keep track of your forex trades. You could also limit your risk by utilising trading tools such as including a stop-loss or alerts when the price reaches a specific level. 

Forex trading vs Stock trading: What’s the difference?

Forex terminology 

Read these next:
Best Forex Brokers In Singapore For Avid Traders
Best Brokerage Accounts To Start Your Investment Journey In Singapore
How To Choose A Brokerage To Trade In The US & HK Market, From Singapore
4 Investing Strategies To Navigate Singapore’s Stock Market
How To Actually Start Investing In Stocks: A Step-By-Step Guide