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How to invest in forex for beginners

Felicia Tan
Felicia Tan8/6/2020 10:15 AM GMT+08  • 6 min read
How to invest in forex for beginners
Great forex trading tips for beginner investors.
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The foreign exchange (forex) market has a reputation for being difficult amongst investors due to its somewhat volatile nature.

At first glance, forex trading is complicated. There’s a whole gamut of contracts, of different currencies, with minimum bid sizes and so on.

However, forex markets are also one of, if not the largest and most liquid financial markets in the world. This means traders are able to get higher returns quickly, or lose their positions just as quickly. Add in the time zone difference – the US dollar, the Swiss Franc, and the Euro are likely to react to news happening during their respective market hours – forex is not for the faint-hearted.

Yet, in a sign how the forex trading is likely to see growing interest here, SGX recently acquired the remaining 80% stake of forex trading platform BidFX for a whopping US$128 million.

If you’re new to trading and are keen on investing in forex, The Edge Singapore spoke to Jin Dao Tai, founder of LCMS Traders and ForexBriefcase on how beginner investors should begin their foray into the forex market, how to analyse the market, and other strategies.

What should beginner investors know about investing in forex?

Jin: Beginners who are keen to invest successfully will need to keep the following three points in mind

  • Strategy is not everything. There are a wide range of trading strategies available, and you will have to find one that works for you. A good strategy is one that is not only profitable, but one that you are comfortable to use consistently over an extended period of time.
  • Psychology could be more crucial than strategies. Since no strategy is going to be profitable 100% of the time, managing the way you think – whether you’re making a profit or loss at the time – is important.
  • Have reasonable or achievable goals. Take things step by step, and set goals you can reach fairly easily. It will help you enjoy the process. Being able to achieve your goals will also help you think rationally, which will increase your likelihood of success.

How should beginner investors trade in the forex market?

Beginners looking to trade in the forex market will need a system and a coach.

Often enough, beginners will feel that they can learn on their own or endeavour in trial and error. I would recommend anyone who is serious about trading, to have a coach to guide you, and possibly provide shortcuts to make profit out of the market. Your coach will also keep you in check throughout, to prevent you from making emotional or rash decisions.

My top tip? Traders should approach the market with the mindset of accumulating wins rather than expecting a windfall. Due to the volatility in the forex market, it can be easier and faster to achieve repeated smaller wins rather than one big win.

How should beginner investors analyse the forex market?

The forex market deals with pricing currency based on demand and supply. This is driven by the economic data, or overall performance of the country.

Therefore, in addition to being focused on price charts, beginners should learn how to use fundamental analysis as part of their trading arsenal. Initially, it might be difficult to have a firm grasp on fundamental analysis. However, it will allow one to understand the factors behind the price action. Thus, when combining both technical analysis and fundamental analysis, one can build a bigger, clearer picture. Only by combining the two can they understand not only the direction of price movement but also the likelihood and timing of the move.

When is a good time to invest in forex?

When the currencies are moving in a trend, which means that you can see a clear direction, appreciation or depreciation, of the currency. The market is likely to trend either during periods of uncertainty or recovery.

And when is a good time to retreat?

A good time to sit out and wait would be when markets do not exhibit any clear direction or when prices are at extremely high or low levels. At extreme levels, we are likely to see slow price movement and no clear price direction. Any move from that point on would be of higher risk.

What is the biggest advantage and disadvantage of investing in forex?

The biggest advantage of investing in forex is that it is easy to start. All you need is a laptop and a brokerage account and you can start trading. Technically, it is not expensive to start trading. You can start a brokerage account with less than US$500 ($687.50).

The biggest disadvantage, however, is that beginners often dive into it headfirst and trade randomly without learning how to properly. This may result in them emptying their account very quickly.

What’s the difference between investing in securities (or shares) and investing in forex?

The biggest difference between the equity market and the forex market is the trading volume. The forex market has an average daily trading volume of $5 trillion. Putting things in perspective, the New York stock exchange is at about $20 billion.

Moreover, the forex market is open 24 hours a day and 5 days a week, while the stock market is subject to local market hours. Therefore, the forex market not only allows the trader to trade based on their own schedule, but the trader is also able to get in and out of trades easier.

One of the common misconceptions is that traders can lose more than their initial capital.

There are two ways to prevent losing more than your initial capital.

Firstly, keep your losses tight, and always use a fixed stop loss level.

Secondly, a trader should trade with a broker that provides a negative capital protection. What this means is that, in the worst case scenario, the broker (or trading platform) is able to limit one’s maximum losses only to their initial capital.

Is there a particular type of brokerage to look toward when trading in the forex market?

I focus on two key features when selecting one.

Firstly, the safety of funds. You need to ensure that your trading capital is held in a segregated custodian account. This means that your money is kept in a separate account, and the broker will not be able to use your money for their operations. If the broker becomes insolvent, your money stays safe.

Secondly, I look for a brokerage that is regulated by the financial authorities of its respective country such as the Financial Conduct Authority (FCA) in the UK, and the Monetary Authority of Singapore (MAS). A brokerage that complies with established guidelines, meets standards of quality control and investor protection is what assures you of security, fairness and ethical behaviour for each trade.

For more stories on investing 101, click here. For more news and investment insights, see our print edition here.

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