Four Essentials Of Forex Trading
Over 7 trillion dollars worth of forex transactions happen every day, enticing new traders to enter the market and begin their journey. But while forex trading in Australia can potentially deliver profitable returns for savvy investors, beginners must take the time to understand the intricacies of the forex market.
In this guide, we’ll look at four essentials of forex trading in Australia, including understanding currency pairs, trading tools, risk management and implications for tax on forex trading in Australia.
1. Forex trading in Australia — understanding currency pairs
Forex trading is conducted through currency pairs. A currency pair is the quotation of two currencies, where one is quoted against the other. The first currency in the pair is the base currency and the second currency is the quote currency. For example, in the EUR/USD currency pair, the Euro is the base currency and the US dollar is the quoted currency.
Currency pairs can also be classified as major, minor and exotic. Major pairs are the most commonly traded pairs and include the USD as one of the currencies in the pair. Minor pairs don’t include the USD, while exotic pairs include currencies from emerging or developing countries.
2. Using trading tools and platforms
Forex trading tools and platforms are essential for traders looking to participate in the currency market. These tools help traders analyse market trends, make informed decisions and execute trades efficiently. As you start researching options, you’ll typically find there are three major players in this field:
- MetaTrader 4 (MT4) and MetaTrader 5 (MT5) — MT4 and MT5 offer a range of features such as charting tools, technical indicators and algorithmic trading options, allowing traders to create and test their automated trading strategies.
- TradingView — This platform is a web-based charting and analysis tool many traders worldwide use. It provides real-time market data, news and technical analysis tools. TradingView also has a large community of traders who share ideas and strategies, which can help you along your trading journey.
How to choose the right trading platform
Choosing the right forex trading platform is an important decision that can significantly impact a trader’s success in the market. When researching different platforms, be sure to compare the following:
- Ease of use — The trading platform should be user-friendly and easy to navigate. It should provide easy access to important information such as charts, order types and account details.
- Demo account — It helps to choose a platform that offers a demo account to allow traders to test its features and trading strategies without risking real money.
- Features — The platform should offer a range of tools and features that cater to the trader’s trading style and strategy. For example, a trader may require a platform with advanced charting tools and technical indicators if they use technical analysis.
3. The importance of risk management in forex trading
Risk management is a critical aspect of successful forex trading in Australia. It involves using various tools and strategies to identify, assess and mitigate potential risks in the market. Risk management helps traders remain consistent and disciplined while protecting their capital.
One popular risk management strategy is setting a stop loss order, which is an order placed at a predetermined price level. Once the price reaches that level, the trade is automatically closed. On the other hand, a take-profit order is placed at a predetermined price level to close a trade and take profits.
4. Tax and forex trading in Australia — what you need to know
Forex trading is considered a genuine way to earn profits and is defined as an assessable income for tax purposes, so it’s important to understand your tax obligations. Traders who are Australian residents are required to pay taxes on their forex trading profits. Non-residents are also expected to pay tax on any profits made.
Forex trading profits may be subject to capital gains tax (CGT) in Australia. CGT is payable on the profits made from the sale of a capital asset, including forex trading profits.