Five Important Facts About Online Forex Trading in New Zealand
Forex Trading is regulated in New Zealand by the Financial Markets Authority, and you can trade through FMA regulated forex and CFD brokers.
Forex Trading involves buying one currency by selling another, from your trading account, and waiting for the exchange rate to appreciate, then you sell.
This is done in the form of contracts such as the contract for difference (CFD) which allows you to benefit from changes in the currency’s exchange rate, without actually owning the currency.
However, once you enter the forex market as a retail trader, the risks are the same no matter what part of the globe you are in. Almost 80-90% of retail forex traders lose money. For every dollar you make, someone somewhere lost a dollar.
Market risk and counterparty risk are all too real in the forex market and hence adequate knowledge is required before venturing into trading.
Here are some important facts about forex trading in New Zealand that you should know before deciding to invest your money in forex trading.
1. Forex brokers must be licensed by FMA
The Financial Markets Authority (FMA) regulates online forex trading in New Zealand. They emit licenses to provide derivative products to forex brokers.
Each license they issue carries a unique Financial Services Provider (FSP) number, which identifies the broker. For example, CMC Markets NZ has an FSP number of 41187.
You should ensure that your forex broker is licensed by the FMA to supply derivatives to the public as a ‘derivatives issuer’ and not any other service.
This is important because when most people see an entity with an FSP number, they instantly assume that person is licensed to be a forex broker. This is not always true as that person might be licensed to provide other services and might be acting outside of their license permit.
To confirm if a broker has a genuine license, get their FSP number from the regulatory corner of their website and follow these steps:
When dealing with an FMA-regulated broker, you can rest assured that your broker is held accountable, as there are heavy penalties for brokers who act fraudulently.
According to Forex Beginner New ZealandAlthough some brokers are licensed by regulators in other countries, it is important to only register with those licensed by the FMA in New Zealand for the safety of your funds and transparency.
“There are several overseas CFD brokers that accept New Zealand clients, but these brokers are high risk if they are not licensed in New Zealand, and clients should not deposit funds with these brokers for safety funds.” warns Rahul of Forex Beginner.
“Clients should also check the ‘license category’ and ‘license status’ on the FMA website for licensed entities to ensure that the broker is authorized to offer the services they claim to be. authorized to offer.”
2. Trading CFD forex contracts involves the use of leverage
Leveraged trading means that you take out a loan from your broker to trade with. Your broker offers leverage to trade derivatives like contract for difference (CFD).
Leverage is expressed as a ratio and forex brokers in New Zealand can offer leverage as high as 1:500 to traders. This means that with $1 of your trading capital, you can trade currencies worth $500.
You need to be careful when using leverage, as it could compound your losses if the market moves against you.
You believe the USD will strengthen against the NZD, so you intend to buy CFD contracts for 100,000 NZD/USD units at an exchange rate of 0.6616, to take advantage of this rise without owning actually the currency pair.
You need a total of $66,160 to make this purchase, so your broker allows you 1:500 leverage.
However, you must put down an initial security deposit, to show your good faith while your broker lends you the difference.
This initial margin is calculated as 1/500 x $66,160 = $132.32
So with $132.32 you can trade currency pairs worth $66,160 and that’s leverage!
Now suppose you got your prediction wrong and USD/NZD falls to 0.6602, you lose 0.6616 – 0.6602 = 0.0014 or 14 pips
Your loss translates to 0.0014 x 100,000, or $140
You have lost 105% of your initial investment of $132.32, and remember that you still have to repay the loan with your broker.
If you had gone for a modest leverage of 1:20, your initial margin would now be $3,308 (or 1/20 x $66,160) and the loss of $132.32 would have been only 4% of your initial investment of $3,308.
Leverage increases your losses, so as a trader you should avoid excessive leverage.
3. You pay income tax
The New Zealand government levies a Residents Withholding Tax (RWT) on all residents who derive income from employment or investments. The tax rate depends on your annual income. See the table below:
Total income before tax for the year
Your RWT rate is
$14,000 or less
$14,001 – $48,000
$48,001 to $70,000
$70,001 – $180,000
As shown in the table above, if you earn less than $14,000 per year from your forex trading, you will be taxed at a withholding rate of 10.5% and so on.
4. Stop Loss orders are essential, but they don’t always work
This is not to discourage you from using stop loss orders, but you should understand that they may not work well during high market volatility.
A stop loss order automatically stops you out of your open position, when the exchange rate of a currency pair crosses the stop price you set.
It then executes a market order to sell your currency (or buy currency as the case may be) at the next available price to limit your losses.
Stop loss orders do not prevent losses but they limit losses.
However, during periods when the market is unstable, and sometimes during weekends when the market is closed, prices can “spread out” or exceed your stop price. This causes you to close your trading position at a lower price than you had envisioned.
Imagine you spend $66,160 to buy 100,000 units of NZD/USD, as a CFD contract at an exchange rate of 0.6616 and place your stop loss order at 0.6615 (which is the price stop).
You agreed to take a loss of 0.6616 – 0.6615 = 0.0001 or 1 pip if the market moves against you.
By placing your stop loss at 0.6615, your acceptable loss is $10.
In periods of high volatility, the exchange rate can jump from 0.6616 to 0.6611 without going through 0.6615, this is called gapping.
The stop loss order will now be triggered at 0.6611 instead of your stop price of 0.6615.
The difference is now 0.6615 – 0.6611 = 0.0005 or 5pips
Your loss is now $50.
The point here is that you planned to take a loss of $10, but ended up taking a higher loss of $50 because your stop loss order was executed at 0.6611 instead of the 0.6615 that you defined.
5. You need lots of extra cash on hold
Exchange rates may move against your trading position.
Political events, conflicts, bad news in the media, among other factors, can cause a currency to lose value very quickly.
As seen in example 1 above, when you borrow money to buy currencies, you must make a good faith deposit called initial margin.
As you continue to trade you may incur losses and once these losses begin to consume your initial margin deposit, your broker will promptly send you a “margin call”.
A margin call occurs when your broker asks you to deposit more money into your margin account, to bring your initial margin back to the required level. It’s not always a phone call; it can be an SMS or an e-mail.
If you cannot find the necessary money, your broker will close all your open trades to prevent your account from going negative. When this happens, you bear the losses.
That’s why you need to have extra cash on standby.
You also need to keep money for fees such as brokerage commission, overnight swap fee, idle fee, guaranteed stop loss fee, spread, etc. You can compare forex brokers to see which ones offer fees that suit you.
Don’t get caught by the Unconscious
Before trading forex, you should read and add knowledge as it can be very technical. You also need to understand the risks so you know what to expect.
Stop loss orders should be used to limit losses, but when the markets are very volatile, you can use guaranteed stop loss orders (GSLOs).
GSLOs ensure that your stop loss order is filled at your specified stop price, but your broker may charge you a fee to use them.
You should also avoid using too much leverage as this could increase your losses and cause you to lose money faster than you think. Avoid forex scams that offer you “no-loss trading” and guaranteed returns, because nothing is guaranteed in the forex industry.