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Everything you need to know about mastering foreign exchange – Stuff.co.nz

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Trading CFDs with leverage is a high-risk financial product, and It’s important to understand the associated risks.

FOREX/SUPPLIED

Trading CFDs with leverage is a high-risk financial product, and It’s important to understand the associated risks.

If you’ve sent money overseas or bought from an international online retailer, you’ll be familiar with how the NZ dollar (NZD) fluctuates daily. And depending on the total, the difference can be significant.

But the fluctuation of money doesn’t have to be negative if you can work it in your favour.

Understanding the basics of currency fluctuation can help you make confident decisions not only with money transfers, but also the buying and selling of currencies – also known as foreign exchange (Forex).

Here are a few tips on how to reduce fees and grasp the basics when:

  • Sending money overseas
  • Trading currency
The fluctuation of money doesn’t have to be negative if you can work it in your favour.

FOREX/SUPPLIED

The fluctuation of money doesn’t have to be negative if you can work it in your favour.

CONSIDER YOUR TRANSFER OPTIONS

Banks

All New Zealand banks provide services to send money to overseas accounts, but what they charge can vary wildly. While using the bank is convenient , they often add ‘spreads’ (or transaction charges) on top of fees. The good news is there are alternatives to the banks.

Service payment sites

Most businesses and individuals in NZ will use payment sites – where you pay their ‘account’ directly. Service payment sites can be convenient and have the added benefits of buyer protection in many cases. But their spreads can often be the highest in-market, leading to costly charges to send money overseas.

International transfer portals

Another option is to use an international payment transfer site. Anti-fraud verification is required, and once set-up, an individual or company can send funds from their local bank to the provider.

The provider then transfers the funds to the overseas bank account. While setting up this account takes time and transfers are not instant the spreads and fees can often be the lowest, which can lead to significant savings.

HOW TO BUY AND SELL CURRENCIES

Using transfer services as above to trade currencies isn’t practical because fees and clearance times often outweigh any measurable returns – particularly if fluctuations between national currencies (such as NZD/ AUD) is small. Enter foreign exchange trading (Forex).

What is foreign exchange trading?

Forex is the largest investment market in the world, according to Investopedia. And at nearly $4 trillion daily average it and continues to grow each year as increasing numbers of people have found it suitable for their investment goals.

HOW TRADING CURRENCIES WORKS

  1. Pairing two currencies
    Firstly all currency trading is done in “pairs”. Unlike the stock market, where you can buy or sell a single stock, you have to buy one currency and sell another currency in the forex market.
     
  2. A percentage difference is predicted
    You don’t physically buy and sell currency, but rather trade a currency pairing (such as the NZD/USD) predicting which direction the New Zealand Dollar will head. Next, nearly all currencies are priced out to the fourth decimal point. A pip or percentage increase in a decimal point is the smallest increment of trade.
     
  3. Investments are made on the difference
    Leverage is then offered which allows an individual to trade a multiple of their deposit (up to 500x). With heavily leveraged deposits, even the modest movements of currencies can lead to significant profits and/or losses.
Banks provide services to send money to overseas accounts, but what they charge can vary wildly.

FOREX/SUPPLIED

Banks provide services to send money to overseas accounts, but what they charge can vary wildly.

KEY ELEMENTS TO CONSIDER WHEN CHOOSING A FOREX BROKER

To avoid high fees and spreads, there are specific forex brokers in NZ who deal with trading currencies.

1. Make sure the forex broker Is New Zealand-regulated

The Financial Markets Authority (FMA) is the government body responsible for regulation in New Zealand. Brokers that are NZ-regulated:

  • Are compliant with New Zealand business law
  • Are subject to periodic audit to ensure they meet FMA standards
  • Have a sufficient reserve of liquidity to pay customers with no delay
  • Keep traders in segregated accounts
  • Maintain an office within New Zealand

2. Understand the forex trading platform used

There is a wide range of trading software offered which impacts a trader’s experiences and features. It’s important to understand what forex platform a broker offers and how popular the platform is.

As a general rule, the two most popular forex platforms are MetaTrader 4 and cTrader. Choosing these platforms gives flexibility to share features with other traders and to switch to other forex brokers that offer the same platform in future with minimal fuss.

3. Choose a forex broker to suit your trading requirements

Some forex brokers are designed for experienced high-risk traders, and offering low fees with high leverage options.

But these brokers may not be suitable for those new to forex trading.

Newbies might want to consider a lower leverage broker that offers risk management features such as Guaranteed Stop Loss Orders (GSLO) and Negative Balance Protection – a feature especially critical to preventing losses exceeding the deposit made with the broker.

Overall, trading CFDs with leverage is a high-risk financial product. It’s critical to understand the risks associated with forex trading and can be worth trialling brokers free demo accounts prior to opening a live account.

Disclaimer: Trading in financial instruments carries various risks, and you can lose more than your capital. This article may contain general advice. You should always seek professional advice when deciding if a product is right for you.

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