What is forex trading? It is betting on the exchange rate between two currencies, usually with borrowed money. You “buy” one currency against another, such as the euro against the US dollar, and profit if it rises or lose if it falls. Retail forex in Singapore is mostly traded as leveraged contracts with a provider, so small currency moves turn into large gains or losses on your deposit.
Risk warning: leveraged forex is high risk. At the 20:1 leverage available to retail traders, a 5% move against you wipes out your entire margin, and you can lose more than you deposited. MoneySense warns that leveraged products can lose more than you originally invested. This page explains how forex trading works. It does not suggest you try it.
Forex Trading Is Not Changing Money for a Holiday
Buying yen for a trip, or holding US dollars in a multi-currency account, is currency exchange. You own the money. If you only need foreign currency for travel or spending, our guide to paying less on overseas spending is the relevant one.
Forex trading is different. You never receive the currency. You hold a contract that pays the difference in price, usually a forex CFD, and you pay to keep it open.
What Is Forex Trading: Pairs, Pips and Lots
Pairs. Currencies are quoted in pairs. EUR/USD at 1.1000 means one euro costs 1.10 US dollars. Buying the pair is a bet the euro will rise against the dollar.
Pips. For most pairs, a pip is a move in the fourth decimal place, 0.0001.
Contract size. IG quotes a standard contract as 100,000 units of the first currency and a mini contract as 10,000. On a 10,000-euro position, each pip is worth US$1. On 100,000 euros, it is US$10.
Margin. IG lists a 5% retail margin on EUR/USD. OANDA says MAS sets retail margin rates and that it offers retail clients leverage of up to 20:1. At 5%, a 10,000-euro position at 1.1000 (worth US$11,000) needs US$550 of margin.
What a Move Does to US$550 of Margin
Our illustration: a 10,000-euro long position on EUR/USD opened at 1.1000 with US$550 margin. Costs are left out. Illustration only.
| Euro moves against the dollar | Pips | Profit or loss | Left of your US$550 |
|---|---|---|---|
| Up 1% | +110 | +US$110 | US$660 (+20%) |
| Down 1% | −110 | −US$110 | US$440 (−20%) |
| Down 2.5% | −275 | −US$275 | US$275 (−50%) |
| Down 5% | −550 | −US$550 | Nothing left |
| Down 7% | −770 | −US$770 | You owe US$220 |
Long before the last row, the provider would likely issue a margin call or close you out. OANDA’s terms say it closes positions when available funds fall below 50% of the margin needed to keep them open, and does not need to give notice first.
The short version: forex trading is a leveraged bet on currency moves. At 20:1, a 1% move changes your deposit by 20%, and a 5% move ends it.
What Forex Trading Costs
- Spread. The gap between buy and sell prices. CMC Markets lists EUR/USD spreads from 0.5 points and USD/SGD from 1.5; IG lists a minimum of 0.6 points on EUR/USD. Spreads widen in fast or thin markets.
- Commission. Some accounts charge commission instead of a wider spread. OANDA’s Core pricing charges S$4.40 per 100,000 units each way on SGD-based accounts.
- Overnight financing. Positions held past the daily cut-off are charged or credited based on the interest rate gap between the two currencies, plus a provider fee. IG says its administrative charge does not exceed 0.8% a year; OANDA lists 0.75% for most pairs. IG charges three days’ financing on positions held over Wednesday night to cover the weekend.
- Currency conversion of profits and losses into your account currency, which OANDA prices at a 1.0% mark-up on its v20 accounts.
On a US$11,000 position, a 0.8% yearly admin charge alone is about US$88 a year, before the interest rate gap, which can add or subtract.
The Risks Beyond Leverage
- Gaps. Currencies can jump over weekends or after unexpected news. A stop-loss order may fill at a much worse price unless it is guaranteed, which costs extra.
- No negative balance protection. OANDA’s Singapore agreement states it does not provide it. IG’s and CMC Markets’ Singapore terms also make clients liable for debit balances.
- Counterparty risk. Your contract is with the provider, not a market. If it fails, you are its creditor.
- Scams. “Forex mentors”, signal groups and managed-account offers on social media and messaging apps are a common route for fraud. MAS keeps an Investor Alert List of unregulated entities on its website, and any legitimate provider should appear in the MAS Financial Institutions Directory.
Forex CFDs work the same way as other CFDs; our explainer on what CFDs are and how they differ from stocks covers margin calls and costs in more detail. Our factual reviews of OANDA, IG and CMC Markets list each provider’s charges and terms.
Who Forex Trading Does Not Suit
- Anyone building long-term savings. Currency pairs do not grow like a business or pay dividends; one side’s gain is the other’s loss, before costs.
- Anyone who cannot watch positions around the clock. Currency markets keep trading through Singapore’s night hours on weekdays.
- Anyone using borrowed money, emergency savings or money set aside for retirement.
If your goal is to grow money over years, see our guides to investing vs trading and our investment platforms compared guide.
What To Do Next
- If someone offers to teach you forex or trade for you, check their firm in the MAS Financial Institutions Directory before anything else.
- Read a provider’s customer agreement on margin close-outs and negative balances.
- Work out what a 5% move against your full position would cost, in dollars.
- See what steady, unleveraged investing could do instead with our compound interest calculator.
