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What you need to know before you open a forex trading account

  • Written by News Company

In the past, foreign exchange was a market that was only accessible to corporations and institutions. With technological advancements and growth in the money market, today it is possible for anyone to trade in forex.

Forex trading involves the buying and selling of currencies. For one to trade these currencies, they require to collaborate with a broker and open an account. There are numerous online brokers like Rakuten forex brokers who avail online trading platform for people like you.

Once you go to this site, you can easily open an account and can decide to first try out their demo account. This is an account that operated under normal market standards but paper money is used. Its purpose is to get you acquainted with the market before you advance to live trading where your money is at stake.

Here are important things you need to know before you open a forex trading account.

The cost of transacting

For you to trade in currencies, you are expected to pay the spread. The spread is the difference between the offer and the bid. For instance, if you want to sell and are quoted at AUD 10.10, this is termed as the offer. On the other hand, if you want to buy and are quoted at AUD 10.00 this is called the bid. Therefore, the spread of this deal is 10 cents.

You do not have a claim to the physical

When you are trading in stocks, every stock you buy makes you a part shareholder in the company. However, the forex market works differently. When trading currencies, you do not own anything. This is because you are trading in a spot market which doesn’t take currency deliveries.

Your online broker records all your orders electronically where your profits and losses are recorded based on real-time market rates. When you make a profit, your equity is added and deducted when you make losses.

Forex trading as a leverages instrument

Forex trading is termed as a leveraged instrument. Brokers can offer a 1:1000 leverage on your capital. This means that for every AUD 1000 deposited, you are allowed to trade up to AUD 100,000 which is 100 times your capital.

While leverage seems ideal to traders, it is a double-edged sword. You have the chance to make losses or make a lot of money from it. This kind of leveraging can bust a trading account with one trade. This is especially if you leverage equally to your account size. Slight price changes against your leverage can wipe your whole account dry.

For instance, if a currency is currently trading at AUD 10, you can make a deposit of AUD 1000. If you decide to leverage up to AUD 100,000, you buy 10,000 shares of the currency. If there is a slight drop of even 10 cents, your entire capital is wiped out. Therefore, it is important to use leverage wisely. Only trade with an amount you can afford to lose.

Carry trading

Carry trading in forex currency means that you can have a positive or negative carry trade. When you say you have a positive carry trade, the currency you are trading long pays a higher rate of interest that the currency trading short. For instance, if you are long AUD/JPY it means that you are buying the Australian dollar and selling the Yen.

If the AUD pays an interest of 2.5% annually and the yen has no interest, you will be borrowing the Yen and depositing it in the AUD. The currency risk is the trade-off where the AUD may depreciate lower than the 2.5% against the Yen. This is where the trader loses money since the positive carry trade was not sufficient to compensate the loss of capital.

While forex trading may seem attractive, it is required that you get as much knowledge as you can on the trade. By understanding the trade, trading strategies and tricks, you are better placed to make wise decisions while trading.