What is Forex?

Forex, or foreign exchange, is any activity that involves swapping one currency for another. It has existed since the invention of money, facilitating foreign trade and speculation.

While much of this activity happens for a business purpose, retail forex trading is almost exclusively speculative – involving individuals buying a currency in anticipation of its value increasing.

In the past, this was a rather inconvenient activity, but with advancing technology, trading forex became faster, cheaper, and more lucrative than ever for millions of traders worldwide – including those in Singapore, the third largest forex center globally.

Notable Facts About Forex Market

The forex market is the largest financial market globally, processing over $7.5 trillion in trades daily, significantly surpassing the global stock market and decentralized cryptocurrencies.

The forex market is a vast and diverse ecosystem comprising various participants:

• Commercial and Investment Banks: Banks move vast amounts of money on the forex markets, facilitating large transactions for clients and also engaging in speculative trading:
• Central Banks: Central Banks including Monetary Authority of Singapore (MAS) intervene in forex markets to manage the currency’s value according to pre-determined plans. Bank of Japan is famous for its interventions for defending the value of the Japanese Yen.
• Investment Funds: Hedge funds and investment funds seek to diversify their portfolios and hedge their positions in other markets while seeking higher returns.
• Multinational Corporations: These entities participate in forex markets to manage their international business operations, hedge currency risks, and convert revenues from foreign subsidies.
• Retail Traders: Individual traders participate to almost exclusively profit from currency fluctuations. They operate through online brokers.

The forex market offers unparalleled accessibility, operating 24 hours a day, five days a week. However, this vast market remains relatively unregulated, especially at the wholesale level. Thus, retail traders need to stick with brokers regulated in domestic jurisdiction, particularly if those brokers are also regulated in one of the larger markets like the U.S., U.K., or Australia.

Benefits And Risks Of Forex Trading

Some of the benefits of forex trading include:

• 24/5 Market Access: The forex market operates 24 hours a day, five days a week, allowing traders to trade at any time.
• Potential for High Returns: The forex market's volatility presents opportunities for significant gains, especially if using leverage correctly.
• Diversification: Forex trading allows investors to diversify their portfolios by gaining exposure to different currencies.

Meanwhile, some of its risks are:

• Leverage Amplifies Losses: While leverage can increase profits, it also magnifies losses. Traders can lose their initial investment very quickly if overleveraging.
• Volatility: Currency markets can be highly volatile, leading to unexpected price swings, thus requiring sound discipline and risk management.

Key Forex Concepts To Understand

Before engaging in forex trading, there are several key concepts a prospective trader should understand:

• Currency Pairs: Forex trading always involves two currencies, known as a currency pair. The first currency in the pair is the base currency, and the second is the quote currency. For example, in the USD/SGD pair, USD is the base currency, and SGD is the quote currency.
• Bid/Ask Price: The bid price is the rate at which a trader can sell the base currency, while the ask price is the rate at which a trader can buy the base currency. The difference between these two prices is known as the spread.
• Pips: A pip is the smallest price movement in a currency pair. For more information, check our detailed guide on pip in forex.
• Leverage: Leverage allows traders to control a larger position with less capital. For example, with 50:1 leverage, a trader can control $50,000 with just $1,000. However, as previously mentioned, leverage is a double-edged sword, working both to benefit and disadvantage.
• Margin: Margin is the money required to open a leveraged position. It is expressed as a percentage of the total position size. For example, a 2% margin requirement means a trader must hold 2% of the position size as collateral.
• Spread: The spread is the difference between the bid and ask prices. It represents the cost of trading and can vary depending on market conditions and the broker.
• Lots: A lot is a standardized trading size. In forex, a standard lot is 100,000 units of the base currency. There are also mini lots (10,000 units), micro lots (1,000 units), and even nano lots (100 units).

The Importance of Forex Regulation

To minimize the fraud risk, retail forex brokers should stick with regulated brokers who are licensed by official agencies, typically situated in jurisdictions with well-defined laws. Here is the list of reputable agencies overseeing the financial markets in developed nations. These agencies typically compile lists of duly licensed forex firms, prosecute cases involving fraud, and discipline firms that break their rules.

• United States: The National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) jointly regulate online retail forex brokers in the U.S. Additionally, forex brokers typically register as Commodity Trading Advisors or Futures Commission Merchants with these U.S. regulatory agencies to offer services to U.S. clients.
• Australia: The Australian Securities and Investments Commission (ASIC) oversees Australia’s financial markets and services industry.
• United Kingdom: The Financial Conduct Authority (FCA) is the financial services industry regulator in the U.K.
• European Union: Each EU member country must regulate its local financial markets according to the E.U.’s Markets in Financial Instruments Directive II (MiFID II). The EU has a “passport” concept that lets forex brokers offer services to the entire Union while holding a regulation in one of its member states.

If an online forex broker has been doing business for years and is registered, and has consistently remained in good standing with a major regulatory agency like the CFTC, NFA, FCA, or ASIC, they are probably a good pick. Using one of those brokers should provide you with both official protection against fraud and legal recourse in case of a dispute. Still, starting with a regulation in the local market is always good – in the case of Singapore, that would be MAS.

Getting Started with Forex Trading in Singapore

• Choosing a Reputable Broker: A reputable forex broker is essential for a secure and successful trading experience. Generating profits is useless if you are not able to withdraw them in an orderly manner. Ensure the broker is licensed by the MAS, providing an added layer of protection and compliance with local regulations.
• Use a Demo Account: Before risking real money, beginners should practice trading with a demo account. This allows them to familiarize themselves with the trading platform, test strategies, and gain confidence without financial risk. Still, be aware that trading in a simulated environment has a different psychology with using real money.
• Start with a Small Investment: It's advisable to start with a small investment to minimize risk and get used to a real money environment. As traders gain experience and confidence, they can gradually increase their position sizes.
• Find a Suitable Trading Strategy: Different trading strategies suit different traders. Some popular strategies include day trading, swing trading, and position trading. Traders should choose a strategy that aligns with their goals, risk tolerance, and trading style. You can read more about different forex trading strategies.

Frequently Asked Questions

Is Singapore good for forex trading?

If you’re not a professional, Singapore is a great jurisdiction for forex trading due to favorable taxation treatment. Since there are no taxes on capital gains, profits for non-professional traders are tax-exempt.

Is forex trading regulated in Singapore?

Forex trading in Singapore is regulated by the Monetary Authority of Singapore (MAS). Founded in 1971, this entity serves as a Singaporean central bank and a financial regulator. Traders can verify a broker’s MAS regulation by checking the license number in the MAS database.

What is the best time to trade forex in Singapore?

The best time to trade forex in Singapore is in the evening when London and New York markets overlap. Check out our dedicated guide about the best time to trade forex in Singapore.