Is Forex Trading Worth the Risk? A Guide for Beginners

Forex trading in the Philippines may not be as big or as fully in the limelight as the stock market. But it’s starting to gain traction because of the many forex trading platforms available today. 

It's also an excellent option if you want to diversify your investments. According to the 2022 report from the Bank for International Settlements, a global bank for national central banks, the daily global volume for forex trading reached US$7.5 trillion in 2022.^[1]

Here’s an easy guide on forex trading for beginners if you’re interested—minus the information overload! 

What is Forex Trading and How Does It Work?

Foreign exchange trading, or forex, is the act of buying and selling currencies. Buyers and sellers transfer currency between one another at an agreed price, usually in an over-the-counter (OTC) market. You’re betting on one currency to increase its value and the other to decrease with the goal of making a profit. 

Read more: Investment vs Savings: Where Should I Put My Money?

What are the Types of Forex Markets?

Before starting your journey, you must know three different types of forex markets. 

📌 Spot Forex Market

It’s the primary forex market where exchange rates are determined in real time. Currency pairs are bought and “sold on the spot.” In short, the spot forex market deals with transactions in the present. 

📌 Forward Forex Market

In this market, a contract is agreed upon when buying or selling a set amount of currency at a specific price. The transaction is then done at a specific date or a range of future dates.

📌 Future Forex Market

A contract is set between buyers and sellers to buy or sell a specific amount of a currency at a particular price and date in the future. Unlike forward forex, contracts in this market are legally binding.

Advantages of Forex Trading

One thing you should know about how forex trading works is that there are many advantages to it. Here are some of them: 

👍 Diversification

Forex allows you to dip your toes into foreign markets. Investing in other currencies minimizes your risk since it uses these foreign currencies to hedge against local economic downturns. 

Moreover, markets follow up-and-down cycles. When the Philippine economy is down, expect other global economies to be up, and vice versa. Hence, investing in different currencies allows you to weather local market downturns.

Read more: To Invest or Not: The Best Investments for Every Risk Appetite

👍 Leverage

Leverage is borrowed capital where you take on debt for an opportunity to reap big wins on your trades. The amount of leverage provided can be 50:1, 100:1, or even 200:1. This means that when you deposit ₱10,000 with a 100:1 leverage, you can trade ₱1 million worth of currency. 

With leverage, when you win, you can win big. But note that it also works the other way around, and you can lose a lot of money.

👍 24-Hour Trading

Unlike the stock market, where buy and sell orders can only be made during market hours (9:30 a.m. to 3:30 p.m.), the forex market is open 24 hours a day, five days a week. 

It thus allows busy individuals to trade after office hours. Also, since you’re trading foreign currencies in a global market, you can use the time of day (or night) to your advantage. 

Most forex traders trade during the “off” hours or late Asian, US, or early European trading sessions from 2 p.m. to 6 a.m. (New York) or 7 p.m. to 11 a.m. (UK). 

For forex trading in the Philippines, the ‘off’ hours are the country's typical working hours, which are 2 a.m. to 6 p.m.

👍 Lower Fees

You are your own broker when you participate in the forex market. Most trading platforms don’t charge commissions. With forex, you’ll pay less in fees (or none at all), unlike in stock trading, where you pay several fees every time you trade.

👍 Automation

Forex trading platforms have automated strategies that allow you to minimize risk without having to look at your screen. These built-in strategies are the stop-loss and take-profit orders. You'll learn more about them below. 

Disadvantages of Forex Trading

There are also downsides and risks in forex trading, the biggest of which are the following: 

👎 Counterparty Risks 

The forex market is mostly unregulated, so it doesn’t have a centralized exchange to guarantee risk-free execution of trades. In forex trading, you must be aware of the default risk that counterparties may not honor their contracts. 

👎 Operational Risks

Because the forex market operates 24 hours a day, it’s hard to manage operationally. Traders must rely on algorithms to protect their forex investments when they cannot monitor the daily changes. If you don’t have the knowledge or capital to manage your positions, it can result in a loss of value on the nights or weekends.  

👎 Leverage Risks

As a beginner, you may not immediately realize that this highly volatile market poses plenty of hidden dangers. If you place highly leveraged bets, it’s possible you can lose your entire investment in just minutes. 

👎 Complicated Price Determination Process

Many factors, including economic stability, global events, central banks, and politics, affect the value of the currency pair rate. You should consider all these things to interpret the charts correctly and avoid significant losses. 

👎 High Volatility 

Expect a lot of big upswings and downswings in the forex market. Some traders consider them as opportunities to make a high profit. But they can also be an indication of potential uncontrolled losses. 

How Much Do You Need to Start Forex Trading?

You don’t need millions of pesos to start forex trading in the Philippines. Some online forex brokers require a minimum deposit ranging from ₱5,000 to ₱500,000. You can then build up your fund once you’re more comfortable. 

Read more: Where Can I Invest My 1,000 Pesos? Affordable Investments to Start Now

How Much Can You Earn in Forex Trading?

Successful and experienced traders with a 55% win rate can make returns above 20% per month.^[5] 

However, forex trading is very high-risk, so risk management should be a big part of your strategy. To enjoy profitability in forex trading, consider the time frames as well. 

It’s easier to profit in the short term, as in days or weeks, compared to forex trading for several months or years, where you need significant cash as leverage. 

Forex Trading for Beginners: How to Trade Forex in the Philippines

Wondering how you can start forex trading in the Philippines? It’s easier than you think. 

But before you create a trading account, learn tips and find tools on how to start forex trading for beginners from these online forex brokers:

• AvaTrade
• eToro
• XM Global Limited
• Vantage 
• OctaFX
• Tickmill
• Alpari International
• IG
• Pepperstone
• FXPro
• IQ Option

Once you’re ready, follow these steps to get started:

1. Search for an online forex broker that accommodates traders from the Philippines.
2. Create an account with the broker. 
3. Fund your account. Most online brokers accept online payment services for funds.
4. If your chosen broker has a mobile app, download it for forex trading on the go.
5. Start making your first trade.

💱 How to Place a Forex Order

After you’ve opened a trading account, make sure to do careful fundamental and technical analyses. After this, you’re ready to place a forex order.

1. On the main page of your forex trading platform, you’ll see a series of currency pairs and their buying and selling prices. 
2. Pick the pair you want to trade and click the buy or sell options. 
3. An order form will pop up. Follow the prompts to buy or sell. 

You’ll see several technical terms in the order form. To develop strategic trade and avoid losses, here is a simple explanation for each.

Pip 

It’s an acronym for percentage in point or price interest point^[6] and is the unit used in a currency quote. A pip is the smallest value by which a quote can change. 

1 pip = 0.0001 for currencies displayed to four decimal places

For example, if you trade the currency pair EUR/USD at EUR 1 = USD 1.1250, and the USD loses value and is now USD 1.1255 to a euro, the quote displays a five-pip increase (0.0005).

Stop Order

You put a stop order to "stop" an order up until the currency reaches a specified price. Your market order will only be activated once the currency reaches this price to minimize losses. 

Profit Order

A take-profit order is a limit order that is closed once a specified profit level is reached.^[4] It works similarly to a stop order.

Limit Order

A limit order sets the price you’re willing to buy and sell a particular currency. Since forex is an online marketplace for buyers and sellers, the limit order guarantees that you won’t be overpaying. 

You can liken the limit order to an auction where you set a threshold―the maximum amount you’re willing to buy an item, or in this case, a currency. 

Remember that you will encounter these terms whenever you buy and sell currencies. You can’t trade forex without understanding these basic terms.

🕰️ When is the Best Time to Trade Forex in the Philippines?

A network of banks across major forex trading centers in various time zones runs the forex market. These major centers are London, New York, Sydney, and Tokyo.^[2] Since there’s no definite central forex market location, you can trade forex 24 hours a day.

So what’s the best time to trade forex?

Forex markets open from 10 p.m. (UTC) on Sundays when Sydney sessions start, up until 10 p.m. on Fridays when the New York session closes for the weekend.^[3] 

Meanwhile, the best forex trading time in the Philippines is when the forex market is most active, usually during overlap windows. Use these hours as a guide for forex session times in the Philippines.

• 1 p.m. to 4 p.m. (GMT) - London and New York exchanges are open 
• 12 a.m. to 7 a.m. (GMT) - Sydney and Tokyo exchanges are open 
• 8 a.m. to 9 a.m. (GMT) - London and Tokyo exchanges are open

It also depends on your preferred currency pair. Ideally, the sessions for the currency pair should be open at the same time. For example, there will be a higher trading volume and liquidity for GBP/USD if both London and New York sessions are open.

5 Strategies of Forex Trading for Beginners

Take note of these terms and understand them well to develop a good forex trading strategy. 

👉 Day Trading

Day trading is a forex trading strategy where you enter and exit a transaction during a single trading session. 

Simply put, you buy and sell currencies within a single trading day. You close out positions at the end of the day and start again the following trading day. This strategy helps avoid risks involved in taking overnight positions.

👉 Swing Trading

This strategy is used to enter and exit the forex market based on momentum technical indicators. Swing trading is usually done to purchase low currencies and sell them at a high margin. It also involves trading at a high volume in a very short time. 

👉 News Trading

News trading is a forex strategy that takes advantage of changes in volatility caused by important news or economic data. You’ll need to make quick decisions when using this strategy, as the impact on financial markets may be immediate. 

👉 Trend Trading

This forex trading strategy is used to establish trends and trade along with them until the trend’s downward movement. It is a long-term trading strategy.

👉 Forex Analyses

Forex trading requires time and effort to come up with promising currency pairs. You need to study the markets and economies of the countries whose currencies you plan to trade. 

Remember that you are your fund manager when trading forex in the Philippines. When choosing currency pairs, use both fundamental and technical analyses to come up with decisions that will turn a profit.

Fundamental Analysis

As with trading stocks, fundamental analysis provides the information you need to pick a promising currency pair. Staying up-to-date with news reports regarding economic and political issues will give you an idea of the currency's value and how it will perform in the near future.

Technical Analysis

Past performance cannot completely predict future performance. But you can use past data as a reference for future performance. It applies to forex trading in the Philippines as well. 

Studying the trends and patterns of currency pairs provides statistical and numerical information, which are helpful when deciding when to trade currencies. Technical analysis will allow you to come up with a decision based on numbers.

Helpful Tips on Forex Trading for Beginners 

Here are some tips before you get started on your forex trading journey: 

• Educate yourself on the forex market. Learn everything you can about currency pairs and the factors affecting them. 
• Create a trading plan. Set your profit goals, determine your risk tolerance level, establish your methodology, and set your evaluation criteria. 
• Put your forex knowledge to the test by using demo accounts. Since it’s a practice account, you can have a feel of what it's like to trade currency pairs in real market conditions. It's risk-free because you don't need to put in capital. 
• Know your limits. As a beginner in forex trading, don't risk more than you can afford to lose. Put stop and limit orders. Don't go all-in when you're losing a trade. 
• Choose a good forex trading partner. From ease of use, pricing and fees, and customer service, pick a forex broker or platform that will make your trading experience smooth, convenient, and secure. 

Final Thoughts

Forex trading for beginners can be overwhelming. But with this guide, you can better decide whether investing in this market is right for you. 

Remember: forex trading is open to everyone. But it’s not for everyone. And like all investments with many benefits, they’re bound to have shortcomings, too. 

There are many online platforms where you can use demo and live accounts and trade currency pairs. If forex trading is something you want to try, do additional research and use a few safeguards to help level the playing field. 

Sources:

• ^[1] OTC foreign exchange turnover in April 2022 (Bank for International Settlements, 2022)
• ^[2] Where Is the Central Location of the Forex Market? (Investopedia, 2022)
• ^[3] Forex Market Hours: When is the Best Time of Day to Trade Forex? (Forex.com, 2021)
• ^[4] Take-Profit Order (TP): Definition, Use in Trading, and Example (Investopedia, 2021)
• ^[5] How Much Money Can I Make Forex Day Trading? (The Balance, 2021)
• ^[6] What Are Pips in Forex Trading and What Is Their Value? (Investopedia, 2023)