How to Start Forex Trading
As a forex trader, your job is to accurately predict price changes between different currencies so that you can buy and sell at the right time. The aim is to profit from the difference. Forex trading is, at its heart, a form of speculation. For example, if you buy EUR/USD at 1.12 and then sell when the value of the euro to the US dollar has risen to 1.14, you will have made a profit.
The foreign exchange is a highly active and regulated market. If you want to get started as a forex trader, read this guide to find out everything you need to know about forex trading.
What is the forex market?
The forex market governs the exchange of the world’s currencies. It sees global daily trades of $5.1 trillion. People, businesses, and investors need to trade currencies for myriad reasons, including to make a profit from day trading. Most currencies are “floating” currencies, which means that their value is not “pegged” to another currency, but is determined by market conditions.
For example, the value of the British pound (GBP) relative to the euro has fluctuated up and down depending on the news about Brexit. As a forex trader, you should be aiming to anticipate these ups and downs in order to put together a profitable forex strategy.
Why trade forex?
Forex trading has skyrocketed in recent years, thanks partly to the proliferation of commission-free online brokerage platforms that have sought to make forex trading more accessible. As a financial strategy, forex trading has many advantages over other forms of trading such as stock trading.
For example, the immense size of the forex market means near-total liquidity, meaning that traders around the world can buy and sell forex exactly when they want. In addition, forex markets operate 24/7, meaning you are not limited to the opening hours of the LSE. Finally, forex prices are tied to global and national economic sentiment, meaning that you don’t need to be a seasoned economist to understand how it works.
Is forex trading for everyone?
If you’re wondering whether forex trading is right for you, it is worth breaking down the pros and cons.
- High volatility can mean huge gains in a short timespan
- Diversity of forex markets means you can easily build a diverse portfolio
- Many top forex brokerage platforms now charge zero commission of forex trades
- Ability to use leverage to open up large trading positions with fewer funds
- High volatility can also mean dramatic losses
- Incremental price movements mean day trading is the best option
- Forex trading comes with substantial risks that exceed many other forms of investment
Complete guide to how you open an account
If you want to start forex trading today, you’ll need a trustworthy online brokerage account that can offer you direct market access and the informational resources you need to make informed forex trades. The forex market is a sprawling consumer marketplace, with hundreds of licensed brokers offering services to UK traders. If you’re ready to open your account and start trading, here is what you need to do.
Choose a forex broker
The first and arguably the most important step in your forex trading journey is choosing the right broker. It is essential that you choose a broker that is fully licensed by the UK Financial Conduct Authority (UKFCA) and offers full fund insurance.
That’s not all, however. You also want a broker that offers a range of quality services for good value. This means access to real market data, rich financial information resources, low spreads, and a large basket of currencies, among other things. Luckily, we are here to help you choose the perfect forex broker for your needs.
Hot Tip: for beginners, we recommend signing up for an account at eToro, which offers a user-friendly site, low fees, and a massive range of assets to choose from.
Step by step
Once you have chosen the perfect forex broker for your trading needs, it’s time to open a forex trading account. Here is the step-by-step process you would typically have to follow:
- Select a trustworthy and suitable online forex broker
- Click the “sign up” or “create account” button
- Enter personal details such as name, address, age, and country of residence
- Submit verifying documentation (if applicable)
- Select your account type
- Select your payment platform and preferred trading preferences
- Start trading
If you are new to forex trading, it pays to try out a demo account first. Many online forex brokers even let you use a demo account without having to sign up for their services or make a deposit. A demo account allows you to use real-world forex and financial data to learn more about the processes that influence the value of different currencies.
Most importantly, a demo account allows you to make practice forex trades using unlimited “dummy money” provided by the brokerage platform. Obviously, you will not be able to make a profit from dummy money trades, but you will be able to see in real-time how forex trading works and get an insight into whether your own trading strategies would be successful in the real world.
Demo accounts rely on real market data and actual currency prices, meaning that they are an ideal way to practice before trying out the real thing. It is absolutely recommended that all first-time forex traders use a demo account before using real money to invest or trade.
Up until just a few short years ago, you would have to pay eye-watering commissions and account fees if you wanted to participate in the forex industry. That is why most forex trading was inaccessible to all but the most well-funded institutional investors.
Today, that has all changed. The top forex trading platforms rarely charge any fees at all for membership, while most do not charge any commission on currency trades (although many do charge commission for cryptocurrency trades).
However, that does not mean that forex trading is completely fee-free. Many brokers require you to make a first-time “minimum deposit” of cash to get your account going, which can be anything from £50 to £500. However, this is still your money to trade how you wish.
In addition, many platforms charge “inactivity fees” for users that are not online which can be as high as £100 a month. Always read the T&Cs to find out how much your brokerage platform is going to cost you.
Make your first trade
Once you have your account all set up, you are ready to start trading real forex pairs on the global marketplace. To do this, you will need to have money deposited in your forex account. This is the money you will need to buy and sell various currency pairs.
With a quality broker, you can instantly buy and sell currencies at current market rates, allowing you to put together a solid strategy. Let’s walk through a quick example to better explain how to make your first forex trade.
Let’s say the Japanese yen (JPY) is trading at 110 yen against the US dollar (USD). This means that it costs 110 yen to purchase one single dollar at current market rates.
As a trader, you could plan to hit BUY on USD/JPY in the hopes that the value of the USD will appreciate against the yen, meaning that one dollar is worth more yen. If this price change does materialize, you would hit SELL on USD/JPY, pocketing the difference.
Pip is an acronym for “point in percentage” and refers to the smallest possible change in a currency pair’s exchange rate. It is essentially a unit of measurement. In most currency pairs, you will find that the typical pip size is 0.0001.
Forex spreads are set by the broker and are essentially the difference between the bid (sell) price and the ask (buy) price of a currency pair. The lower a spread, the better it usually is for your profit margins. Spread will typically fluctuate throughout the day depending on market conditions and liquidity.
Leverage is the size of a trading position that your broker will allow you to open with a given amount of money placed as a deposit (known as margin). Leverage positions can be as high as 1000:1, meaning you could have a position worth thousands of dollars from just a few bucks. Of course, this also exposes you to higher levels of risk.
Lots are, quite simply, the number of currency “units” that you will buy or sell. It is a standardised way of measuring the size of a forex transaction. Lot sizes are pretty much identical around the world.
Forex trading is an immense, highly competitive, and rapidly-growing form of financial activity. It comes with substantial risks, which is why those hoping to make long-term profits must remain informed and only ever use a trusted forex broker. With the right resources at your disposal, you have the potential to make any forex trading plan a success.