The Foreign Exchange Market, otherwise known as Forex or FX, is the largest financial market in the world by volume. Each day, transactions worth trillions of dollars are completed on the market.
The Forex market is where banks, investment funds, and individuals go to trade currencies. It’s a global, over-the-counter market, which pairs buyers and sellers hoping to exchange various currencies.
Forex trading takes place 24 hours a day, 5 days a week. The exchanges made on Forex set the global exchange rates for just about every currency out there. The exchange rates that you might find at a bank or airport travel kiosk are set based on Forex trading. And in fact, when you exchange money at a travel kiosk, you’re technically completing a Forex transaction.
The biggest users of the Forex exchange are financial institutions and banks. They trade various currencies to assist in the day to day operations of their businesses, as well as to profit from speculative trades.
Individuals also participate in Forex trading, mostly for speculative purposes. For example, if a trader believes that the AUD is strengthening, they can place a trade based on that belief.
When trading currencies on the Forex exchange, currencies are paired up. For example, the AUD/USD pair represents the exchange rate between the Australian dollar and the United States dollar. Commonly traded pairs include EUR/USD, JPY/USD, GBP/AUD, and others.
When a trade is placed, the trader is buying one currency by selling another. As such, Forex pricing doesn’t represent a comprehensive value for a specific currency – but rather, a value for a specific currency as compared to another specific currency.
Forex is a complex market. It’s primarily used by banks and sophisticated traders, but average investors can also participate. Forex traders in Australia must use a Forex broker to conduct trades.
What is a Forex broker?
A Forex broker, sometimes called a FX broker, is a company that facilitates trading on the Forex market.
Forex brokers make money on the spread, which is the difference in price between the buy price and the sell price on a given currency pair. These spreads are very small, but brokers make their money because of the huge volume of trading that takes place.
Some FX brokers will charge a small commission on every trade. This is typically in addition to spread pricing differences – although generally speaking, brokers who use trade commissions often have better spreads.
These brokers are similar to stockbrokers where investors buy and sell equities, bonds, etc. The difference is in the types of financial vehicles available to trade.
Most Australian FX brokers focus specifically on Forex, rather than other markets. This means that most Forex brokers only offer Forex trading. A few buck this trend by also offering trading in equities, funds, and even alternative assets like cryptocurrencies.
Why are Forex brokers needed?
Forex brokers facilitate trades between buyers and sellers, essentially acting as a middleman. Every trader in the Forex market must use some sort of broker.
Brokers provide the actual platform, infrastructure, and technology needed to facilitate trading. Their interfaces allow traders to navigate the complex Forex market and trade with an informed outlook.
Forex brokers are also the main way that most traders obtain information on the actual currency exchange rates. Forex is not a centralized market like the stock market, which means that each broker may have slightly different pricing at any given moment. Each broker will have a real-time feed of current prices for each currency pair, and rates will update constantly while the market is open.
Risks of Forex trading
Forex trading is a high-risk activity. Most trades are conducted with a substantial margin (loans), which means profits and losses are magnified. Even a small amount of volatility in the wrong direction can cause substantial losses. Most trading platforms have disclaimers relating to this risk, and indeed most beginner Forex traders lose money.
Forex trading is best for experienced, sophisticated traders. Unlike passive stock index investing, trading on the Forex market is usually not recommended for casual investors.
What to look for in an Australian Forex broker
There are many brokers serving Aussie investors. How do you pick the “best” one? These are some of the factors that you should keep in mind.
Trusted, regulated brokers
To avoid scams and issues, it’s very important to work with a trusted broker. Forex brokers are regulated by various financial authorities. Each country has its own regulators – the FCA in the UK, and the FSCA in South Africa, for example.
In Australia, the relevant financial authority that regulates Australian financial services is the Australian Securities and Investments Commission (ASIC).
Australia has strict rules for regulated Forex brokers. In order to accept Forex or CFDs traders, a broker must first obtain authorization from ASIC, via an AFSL license. These regulations are designed to help keep traders and investors safe from scams, and to strengthen the stability and liquidity of the financial system.
Check out our roundup of the Best CFD Brokers
There are several different trading platforms, or interfaces, that can be used to trade Forex markets. Each offers different features, visual designs, charting, and even trade execution speeds. These platforms offer very different trading experiences, different tools for technical analysis, etc.
Some brokers have their own proprietary platform. Some use existing platforms – MetaTrader 4 (MT4) and MetaTrader 5 (MT5) are among the most popular.
Interestingly, some brokers offer several platforms to choose from. If you have experience with a particular Forex trading platform, look for a broker that offers it. If not, look for a user-friendly option.
There will always be trading costs associated with participating in the Forex market. However, these costs can vary substantially between brokers.
There are two main categories of cost to keep in mind:
- Commission, which is a fee charged on every transaction
- Spread, which is the difference between the listed buy and sell price of a currency pair
The majority of brokers make their money from spreads. This is standard industry practice, and the differences in buy/sell rates are very small. Nonetheless, for high-volume traders, the costs can add up.
Sophisticated traders operating with high trading volume may actually find lower total costs in a trading account with a flat fee commission structure. Generally, brokers that have a commission on each trade will offer tight spreads – which can benefit larger traders. ECN brokers may also be a lower-cost option for experienced traders.
Each broker will offer slightly different investment and trading options. Some offer derivatives, CFDs, and other complex instruments, while others keep trading simpler.
Even for simple currency pairs, the choice of broker makes a big difference. Some brokers may offer 50 currency pairs, while others offer 100+. If variety is important to you, opt for a broker with more substantial offerings.
Leverage and margin
The majority of Forex trading is done using leverage, or margin. For example, a trader may wager $1,000 of her own money, but make a total investment of $10,000 (with a $9,000 margin loan).
Using margin magnifies returns – but also magnifies losses. But because Forex currency exchange prices are much more stable than the stock market, for example, the margin is almost required to make any substantial profit on trades.
If you plan to use leverage, take a close look at the requirements, terms, and costs from each broker. And before you trade, make sure you completely understand the unique risks of trading on margin.
Good customer service is another important factor to look for in a broker. If any issues arise, you want to know that you can trust the broker to sort things out. It’s particularly important for beginners, and high-volume traders.
To gauge a broker’s customer support, you can read customer reviews, or even call in to ask questions.
Social trading is a unique set of features that allow investors to see how other traders are operating, and potentially gain insights into market sentiment. It is primarily aimed at retail investors looking to shadow more experienced traders.
Some brokers go a step further, and offer “copy trading”. As the name suggests, this feature allows users to directly copy the trades of other professional investors. You can follow a trader, allocate funds to “copy” them, and the system will automatically copy each trade they make.
If these features are something that interests you, be sure to look for a broker with social trading tools.
Many Forex brokerages offer learning resources, webinars, blog posts, and other information to help traders learn more about the Forex market. Forex trading is complex, so having some guidance is helpful.
Other financial services
Some Forex brokers only offer Forex trading, while others offer a wide range of financial instruments and account types.
For investors who prefer to keep things simple, there is some appeal in having your retirement accounts, Forex trading accounts, and even retirement accounts in the same place. For other investors, having a wider variety of financial products in one place is not a substantial determining factor.
Best Forex Brokers in Australia
Australian traders from Sydney to Melbourne have plenty of choices when it comes to brokers. The list below compares some of the best options, based on a combination of costs, customer reviews, investment options, and customer support.
A social trading platform broker offering Forex, equities, cryptocurrencies, and more
eToro is a popular trading and investment platform that operates in many countries, including Australia. This broker can be used to trade in most financial assets, including Forex trading, equities, bonds, and even cryptocurrencies like Bitcoin.
One unique aspect of eToro is its social features. Copy Trading, a key offering from eToro, lets everyday investors copy the trades of professional traders, automatically. You simply select a trader to follow, allocate funds, and their trades will be copied automatically.
As for Forex trading, eToro offers 47+ Forex pairs, as well as CFDs and other investment vehicles. The typical spread is around 1 pip. This is slightly higher than some low-cost competitors, but near the average of all options on this list.
For beginners, eToro has a demo account that can be used to test trading strategies risk-free. There are also some learning resources to explore.
A low-cost, high-volume broker with a wide variety of FX currency pairs
IG is one of the most popular FX brokers in the world. The service is a popular choice for Australians, as IG is regulated by ASIC, and offers many benefits for traders.
The first is speed. IG has one of the fastest trade execution speeds in the industry. Their interface is also slick and fast to navigate.
Selection is also excellent. IG offers over 100 currency pairs to actively trade, as well as a huge selection of CFDs. Spreads are very competitive – as low as 0.745 on popular currency pairs.
IG offers beginner-friendly tools and learning resources. The minimum initial deposit is £250.00.
A large broker with competitive pricing and a massive selection of tradable currency pairs
CMC Markets is a popular global Forex broker. Their main selling point is sheer selection: With over 150 currency pairs, and nearly 10,000 tradable instruments in total, CMC’s selection is tough to beat.
In addition to their above-average selection, CMC also offers below-average spread pricing. The typical spread on a popular pair like EUR/USD is just 0.74 pips. For very high-volume traders, CMC’s rebate programs can further reduce these costs.
CMC uses its own Next Generation platform, which is user-friendly and award-winning. There is no minimum deposit to get started.
A popular broker with several trading platforms to choose from
City Index is a good choice for experienced Forex traders, due to its use of advanced trading platforms. It offers its own AT Pro platform, as well as the popular MetaTrader 4 (MT4) interface. There are also two beginner-friendly apps to utilize.
Over 65 currency pairs can be traded at City Index. Spreads on popular pairs are around 1.1 pips, which is slightly higher than average.
City Index is a good choice for traders who want their choice of multiple trading platforms, and who don’t mind paying a bit extra for the privilege.
A powerful platform for high-volume traders
FXCM is a popular choice for active FX traders who trade at a high volume. FXCM’s Active Trader account requires a £25,000 minimum deposit but offers more competitive spreads and advanced trading tools.
Traders can choose between several platforms. MT4, ZuluTrade, Trading Station, and NinjaTrader are all offered.
FXCM offers a normal account, with no minimum investment. However, this account is fairly lackluster – spreads are higher than average, and there are only around 39 currency pairs to trade. For these reasons, we only recommend FXCM for those who will utilize the Active Trader account style.
Useful social trading features, and an intuitive online trading platform
Pepperstone is a simple broker with a user-friendly interface. Its simplicity, combined with social trading features, makes it a popular choice for casual traders.
There are around 60 currency pairs that can be traded on the platform. Pepperstone’s spreads are higher than average, at around 1.16 pips for popular currency pairing. However, there is no upfront commission.
For higher-volume traders, Pepperstone’s “Razor” account has much lower spreads, balanced by a per-trade commission. Pepperstone is also known for fast execution on trades.
There’s no minimum deposit required to open an account, and Pepperstone offers some learning resources and beginner-friendly tools.
A moderate-cost broker known for rapid transaction speeds
FP Markets, or First Prudential Markets, is a large broker that is known for very fast execution speeds. For sophisticated traders, the speed at which an order is executed can be very important. For retail investors, it’s not as big of a factor.
FP Markets also has good customer service, and a solid selection of 60+ currency pairs, as well as CFDs. That said, their pricing is not as competitive as some low-cost brokers on this list. A typical spread on EUR/USD, for example, is around 1.14 pips.
A low-cost broker with commission-based accounts
IC Markets is a popular option among algorithmic traders and large-volume traders. It offers commission-based accounts, with very low spreads between buy and sell prices. The company has operations in Australia, Cyprus, and Seychelles.
They offer trading in 60+ currency pairs, but only a few hundred CFDs. Select cryptocurrencies can be traded through CFDs, but the actual underlying asset cannot be purchased on IC Markets.
On the downside, the research materials, Forex news, and analysis tools that IC Markets offers are somewhat lacking, compared to competitors.