In the world of investment opportunities, forex trading has established itself as a lucrative avenue for investors globally.
In Malaysia, a growing number of individuals are looking towards forex trading as a means to earn profit. This article aims to provide a comprehensive guide to Malaysians who are considering venturing into forex trading.
Let's delve into the aspects that you need to know about forex trading in Malaysia.
Table Of Contents
What Is Forex Trading and How Does It Work?
Forex trading (FX), also known as foreign exchange trading, involves the buying and selling of currencies in the foreign exchange market with the aim of making a profit.
For instance, if you believe that the MYR (Malaysian Ringgit) will appreciate against the USD (US Dollar), you might buy MYR and sell it later at a higher price to make a profit.
The forex market is the largest financial market globally, with daily transactions amounting to over $6 trillion. The market is open 24 hours a day, five and a half days a week with currencies traded worldwide in the major financial centres of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone.
Currency Trading In Forex
In forex, currencies are traded in pairs (forex quote). The value of one currency is always determined in comparison with another currency.
There are seven major currency pairs that account for about 75% of trading in the forex market:
How Are Forex Trades Quoted? (How To Read/Understand A Forex Trade)
1. Currency Pairs
As mentioned above, a forex quote is represented with two currencies. For instance, USD/MYR, where:
The currency on the left, (the USD) is the base currency.
Meanwhile, the currency on the right (the Malaysian Ringgit) is the quote currency.
2. Bid and Ask Price
When you look at a forex quote, you'll generally see two prices:
a) Bid Price:
The price at which you can sell the base currency. It is the highest price that a buyer is willing to pay for a currency pair.
b) Ask Price (sometimes called the Offer Price):
The price at which you can buy the base currency. It is the lowest price that a seller is willing to accept for a currency pair.
For instance, if USD/MYR is quoted with a bid price of 4.1500 and an ask price of 4.1505, it will look something like this:
USD/MYR: 4.1500 (Bid) / 4.1505 (Ask)
The difference between the bid and the ask price is known as the "spread". Using the example above:
Spread = 4.1505 (Ask) - 4.1500 (Bid) = 0.0005
The spread is essentially the broker's commission for executing the trade (though it can also reflect market liquidity).
A "pip" is the smallest price movement that a currency pair can make based on market convention. Usually, a pip is equivalent to a 0.0001 change in value. For example, a one-pip movement would be a change from 4.1500 to 4.1501.
Think of this 4-digit (or 5-digit) as a reflection of the incredibly high volume and liquidity in the forex market, which leads to very small and frequent price movements. This granular pricing helps traders to make more precise decisions and potentially profit from these tiny fluctuations.
To wrap it all up, imagine you are at a marketplace. The currency pair USD/MYR is like an item you want to trade. The seller (the market) is asking for 4.1505 MYR (ask price) for each USD. If you agree to buy at that price, you have made a deal. Conversely, if you want to sell USD, the market is willing to buy it from you for 4.1500 MYR each (bid price). The small difference in price (0.0005) is kept by the broker as their fee for facilitating the trade.
Commonly Used Forex Terms
Forex is traded by what’s known as a lot, or a standardized unit of currency. The typical lot size is 100,000 units of currency, though there are micro (1,000) and mini (10,000) lots available for trading, too.
Because of those large lot sizes, some traders may not be willing to put up so much money to execute a trade. Leverage, another term for borrowing money, allows traders to participate in the forex market without the amount of money otherwise required.
Trading with leverage isn’t free, however. Traders must put down some money upfront as a deposit—or what’s known as a margin.
4. Long and Short
To "go long" means to buy with the expectation that the value will rise. Meanwhile, to "go short" means to sell with the expectation that the value will decrease.
The 3 Ways To Trade Forex
Similar to stock trading, forex trading also involves speculation of future currency price movements. Forex traders attempt to buy currencies they believe will appreciate in value compared to other currencies or to get rid of currencies they predict will see a decline in purchasing power.
There are three different ways to trade forex:
1. Spot Forex Market
In the spot forex market, currencies are bought and sold according to the current price, which is determined by supply and demand dynamics in the market at that particular time.
The main characteristic of the spot market is that the physical exchange of the currency pair takes place at the exact point the trade is settled – ‘on the spot’, which is generally within a two-day period.
2. Forward Forex Market
In the forward forex market, instead of executing a trade now, contracts are bought and sold between two parties who agree to trade a set amount of a currency pair at a specified price at a designated date in the future (or within a range of future dates).
The contracts in the forward forex market are binding (private) and are usually closed out before the designated date, with the parties settling for the price difference.
3. Futures Forex Market
Similar to the forward market, the futures forex market deals with contracts to buy or sell a certain amount of a currency pair at a specified price at a designated date in the future.
However, unlike the forward market, the futures market deals with standardized contracts that are traded on (market) exchanges rather than privately.
Forex Trading Strategies - Hedging and Speculating
In forex trading, both speculating and hedging are common strategies employed by traders and investors to make profits or protect their investments from adverse market movements.
This is especially prominent in the forward and futures markets where traders speculate or hedge against future price changes in a currency. Let's delve deeper into these two strategies:
Speculating involves buying or selling currency pairs with the expectation that they will move in a favourable direction, allowing you to make a profit. It is like making an educated guess where you predict the direction of currency values and trade based on your predictions to make a profit.
Imagine you are betting on a football match. You've done your research and believe that Team A is going to win. You place a bet on Team A. In forex trading, it's quite similar. Let's say you believe that the Malaysian Ringgit (MYR) will strengthen against the US Dollar (USD) in the near future based on current economic indicators. You buy a lot of MYR/USD, hoping to sell it at a higher price later when (and if) the MYR strengthens, thus making a profit.
Short-Term to Medium-Term Trades
Speculative trades often happen over short to medium-term periods, ranging from a few minutes to several days or weeks.
Given the nature of speculation, it is often considered a higher-risk strategy as it depends on price movements which can be unpredictable.
Speculators often use leverage to amplify their potential profits, though it also increases the potential losses.
Technical & Fundamental Analysis
Speculators rely heavily on technical and fundamental analysis to make informed decisions on the potential direction of currency pairs.
The primary objective of speculation is to make a profit from the price fluctuations in the forex market.
Hedging involves taking positions in the market to offset potential losses that may be incurred, effectively protecting your investment from adverse market movements. It’s like taking out an insurance policy for your trades. You make trades to offset potential losses to your investment from adverse market movements, kind of a safety net.
Let's stick to the football match scenario. To safeguard your bet on Team A, you also place a smaller bet on a draw, so if Team A doesn't win, your loss is minimized because you win the draw bet. In the context of forex, suppose you have a significant investment in the US market, and a fall in the USD value could result in a loss. To hedge this, you might also take a position that profits if the USD falls (like buying EUR/USD). This way, if the USD does fall, the loss in your investment is offset by the profits from your EUR/USD trade.
Hedging is primarily used as a risk management strategy to protect investments from unwanted market movements.
Hedging can involve costs, as it might require taking multiple positions which might not always result in profits.
Hedging strategies can be complex, involving multiple financial instruments such as futures, options, and spot forex trades.
Hedging is often employed with a longer-term perspective, looking to protect investments over extended periods.
3. Putting Them Together - Hedging and Speculating
To tie these concepts together, imagine you are a business owner in Malaysia who has to pay a US supplier in USD after a month. Given the volatile nature of the forex market, the MYR/USD exchange rate can fluctuate significantly in a month.
Speculating: If you believe that MYR will strengthen against USD in this period, you might wait to convert your MYR to USD, expecting to get a better rate later.
Hedging: To protect yourself from potential losses if the MYR weakens instead, you might use a hedging instrument (like a forward contract) that allows you to lock in the current exchange rate for a future date. This way, even if MYR weakens, you won't have to pay more than what you had locked in.
How To Start Forex Trading As A Malaysian Investor
Step 1: Educate Yourself
Understand the Basics: Learn the fundamental concepts of forex trading including currency pairs, pips, leverage, and margin.
Get to Know the Market Analysis Techniques: Equip yourself with knowledge of market analysis techniques such as technical analysis and fundamental analysis.
Keep Abreast of Economic News: Stay updated with global economic news as it has a significant influence on forex markets.
Step 2: Choose a Reliable Forex Broker
Regulated Broker: Ensure to choose a broker that is regulated by a reputable authority. In Malaysia, the main regulatory body is the Securities Commission Malaysia (SC).
Transaction Costs: Compare transaction costs, spreads, and potential commissions charged by different brokers.
Step 3: Develop a Trading Plan
Trading Strategy: Develop a trading strategy based on your risk tolerance, capital, and trading style.
Risk Management: Incorporate risk management strategies to protect your capital.
Step 4: Open a Trading Account
Documentation: To open a live trading account, you'll need to provide necessary documents such as proof of identity and proof of address.
Minimum Deposit: Be aware of the minimum deposit requirements of the broker.
Step 5: Start Trading
Analysis: Conduct market analysis before you enter a trade.
Placing Trades: Learn how to place trades, including market orders and pending orders.
Monitoring Trades: Monitor your trades regularly and make adjustments as needed based on market conditions.
Continuous Learning: Forex trading is a continuous learning process. Learn from your trades and improve your strategies over time.
Where To Trade Forex in Malaysia?
I know there are a lot of brokerages out there but to be honest, I don’t really trust them. So, I’m going to recommend some banks and trusted financial institutions that have been approved by Bank Negara Malaysia.
1. Appointed Overseas Office (AOO)
The AOO serves to facilitate wider price availability and enhance the liquidity of ringgit FX transactions outside Malaysian trading hours. Here are some of the banking groups involved:
Al-Rajhi Banking & Investment Corporation (Malaysia) Berhad
AmBank (M) Berhad
Bank of America Malaysia Berhad
Bangkok Bank Berhad
BNP Paribas Malaysia Berhad
And more depending on the country.
Counterparties comprise all the licensed onshore banks in Malaysia, both local and foreign banks, custodian banks both local custodians and global custodians as well as international central securities depositories. Here are some of the banks for both.
a) Licensed Onshore Banks
Affin Bank BerhadBNP
Alliance Bank Malaysia Berhad
AmBank (M) Berhad
Paribas Malaysia Berhad
Bangkok Bank Berhad
b) Custodian Banks
Affin Hwang Investment Bank Berhad
Alliance Bank Malaysia Berhad
Alliance Investment Bank Berhad
Bank of Singapore
Bank of America
3. Primary Market Makers
Bank of America
JP Morgan Chase
Standard Chartered Bank
Pros and Cons of Forex Trading
Now, you might be asking yourself, should you consider going into forex trading? I mean, these days, there are a lot of scams going around after all. So here are the pros and cons of forex trading so that you can weigh it out and determine if it's the right choice for you.
Pros of Forex Trading
1. Liquidity and Market Hours
The forex market is incredibly liquid and operates 24 hours a day during weekdays, allowing for flexible trading hours.
Example: A Malaysian investor can trade with international markets at any time, potentially profiting from economic events happening in different time zones.
Forex trading offers leverage, which means you can control a large position with a relatively small amount of capital.
Example: A trader with a small initial deposit can potentially make significant profits by utilizing leverage wisely.
Forex trading can be a good option for portfolio diversification. It can potentially yield profits irrespective of the trends in other markets.
Example: During economic downturns, a Malaysian investor can potentially hedge risks or make profits by trading forex as it may not be directly correlated with the stock market.
Cons of Forex Trading
1. High Risk and Leverage
While leverage can amplify profits, it can also exponentially increase losses.
Example: A newbie investor from Malaysia might use excessive leverage, only to find that a small adverse movement in currency pairs wipes out their entire capital.
2. Complexity and Need for Knowledge
Forex trading is complex and requires a deep understanding of market analysis, which can be overwhelming for beginners.
Example: A Malaysian investor who jumps into trading without adequate knowledge might make uninformed decisions, leading to substantial losses.
3. Vulnerability to Scams
Unfortunately, the forex market has been a breeding ground for scams and fraudulent activities.
Pump and Dump Schemes: Perpetrators inflate the price of a currency pair artificially and then sell their positions at a high, leaving innocent investors with worthless assets.
Phoney Forex Trading Investment Funds: In Malaysia, there have been cases where scammers have set up fake investment funds promising guaranteed returns, only to disappear with investors' money.
Misleading Marketing and Signal Sellers: Individuals might encounter scams where service providers promise "guaranteed" profitable trading signals for a fee, which turn out to be false.
Advice for Protection Against Scams
1. Due Diligence
Conduct thorough research to validate the credibility of brokers and investment platforms.
2. Regulatory Compliance
Always choose brokers regulated by reputable bodies like the Securities Commission Malaysia (SC) to ensure a secure trading environment.
Educate yourself to discern genuine opportunities from scams.
My Thoughts on Forex Trading As A Malaysian Investor
In my opinion, I think it’s very hard to earn a profit through this because the forex market is notoriously volatile and complex, requiring a deep understanding of economic indicators, market trends, and trading strategies to navigate successfully.
Moreover, the influx of scams adds an additional layer of risk. There are a lot of scams these days so if you want to do it, make sure you use a credible brokerage that adheres to regulations set by authoritative bodies to safeguard your investments.
Like I always say, make sure you equip yourself with enough knowledge through diligent research and education, as well as constantly update yourself on market news and analyses.
This is a realm where informed decisions are vital to securing profits. Moreover, exercise caution with your investment capital; definitely don't put all your money into it. Diversification is key after all, not only within the forex market but across different financial instruments.
By following these guidelines, I hope you can craft a more resilient and potentially successful investment journey in the volatile world of forex trading as a Malaysian investor.
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