TRADING in foreign exchange (forex) is not easy. It requires a lot of research on matters ranging from macro-economic factors to political changes. Hence, very rarely do individuals trade in forex on their own.
It is done by financial institutions such as banks for their customers who may want to hedge their profits or cost.
Below are some details on the nitty-gritty of trading in forex markets.
What is the minimum trade size for forex trading?
For banks, the requirement to trade in the forex market is a minimum amount of US$1mil for spot market trading. Banks do not offer the service of trading forex to individual investors. Individual investors who trade on online platforms can start trading with a trade size of US$100. However, it is largely an unregulated market unlike the platform that banks conduct their trades on.
The currency traded will typically be in G7 currencies such as the US dollar, pound sterling, yen and euro. They too buy on spot prices.
What is the difference between forex trading and dual currency accounts offered by banks to individuals?
Individuals who trade on online forex platforms must typically have a foreign currency account with a bank. Banks will not trade on behalf of the trader. The trader has to trade himself and takes all the risks and returns. The forex services provided by banks to individuals are essentially similar to the services provided by the moneylenders – which is simply to convert one currency to another.
As for the dual currency account, it is only for high-net-worth individuals who need to hedge their ringgit position against a foreign currency because of their need for it. For instance, it can be to support the education of their children or purchase a property overseas.
Under the dual currency account, the minimum transaction is RM50,000 and the “strike price is determined” a week ahead.
The strike price is the price the customer is willing to pay for the conversion of the ringgit into the foreign currency. Exactly one week later, if the conversion does not take place, the customer earns an interest on the ringgit amount. If the conversion takes place, then the customer gets the foreign currency.
Typically, how long is a trade in the forex market? Is it a few days to a few weeks?
Due to the volatility of the forex market, the duration of a trade could be as short as a few seconds. Once a trader makes money on a few basis points, he may decide to close his position.
Why is it generally risky to trade in forex?
Whether or not an investor trades on a real or bogus platform, there is a very high chance of losing money simply because of the volatile nature of the forex market.
One reason for this could be the fact that plenty of novices have extremely easy access to these platforms. Trading on an online forex platform is easier than most people think. All a person needs is to ensure that he has a foreign currency account. Even high school students can trade on forex platforms by using their parents’ foreign currency accounts.
Is leverage used in forex trading?
Leverage is basically the ability to control large amounts of capital using very little of your own capital. The higher the leverage, the higher the level of risk. The leverage system is similar to the one used in equity markets. For example, if a trading position has dropped below its maintenance margin, this will trigger a margin call and the trader will need to top up with more capital.
How risky is leveraging in forex trading?
Forex trading carries above average risk because when a person trades on leverage, this means that a trader can lose more than his initial deposit. The amount of leverage on an account differs depending on the account itself, but most use a factor of at least 50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every dollar you have in your account you control up to US$50.
How can a trader minimise risk when trading in forex?
Traders must have a sound risk management plan such as stop losses. This is because a trader can potentially incur significant losses very quickly when trading on margin. If the market moves drastically and the stop loss has not been put in place, losses could exceed the total amount invested very quickly.
This is made worse by the fact that traders can have multiple leveraged trades open concurrently. So, seemingly small or low-risk trades can add up when these positions are combined.
How soon can a trader get back his money once he closes his position?
Many forex trading platforms allow individuals to withdraw their money from the trading accounts within two working days.
How to differentiate between a legitimate trading platform and an illegal scheme?
Something suspicious could be taking place if the platform offers an individual to undertake trades. If the platform asks for a certain amount of money and provides a guarantee on a certain return, this is most likely a scam because forex markets are too volatile and it is extremely hard to predict the potential returns.
Traders should check whether their online platforms are legitimate by to Bank Negara, which has a list of legal and illegal forex trading platforms.
According to the Bank Negara website, an illegal forex trading scheme refers to “the buying or selling of foreign currency by an individual or company in Malaysia with any person who is not a licensed onshore bank or any person who has not obtained the approval of Bank Negara under the Financial Services Act 2013 or Islamic Financial Services Act 2013”.