How To Trade Forex In The UK — Forex Trading In The UK

Last Updated September 18th 2020

All You Need To Know About How To Trade Forex In The UK

Interested in forex trading but don’t know where to start? You’re in the right place. We’ve put together a handy guide with our top tips on how to trade forex in the UK. 

What Is Forex Trading?

How To Trade Forex In The UK

Choose Your Forex Trading Style

Choose Your Forex Trading Strategy

Select Your Currency Pair

What Are The Forex Regulations In The UK?

Will I Need To Pay Tax On Forex Trading In The UK? 

Start Forex Trading In The UK

Key Points

The foreign exchange market, more commonly known as forex (FX), is the largest financial market in the world. According to the Bank of International Settlements, its average daily trading volume was $5.2 trillion as of April 2020 — and more than 40% of forex trading volune comes from the UK alone. 

The truth is that it’s relatively straightforward to start trading forex. All you need is an internet connection and some know-how, which is where Trading Education comes in. But if you want to learn how to trade forex successfully, it can take years of experience and research. 

Are you keen to gain access to this global market? Read on. Our guide, how to trade forex in the UK, has all the information you need to get started, from finding your preferred trading style to whether or not you’ll need to pay tax on your profits. 

What Is Forex Trading? 

Forex trading is the process of converting a particular currency into another currency — for example, the British pound (GBP) into American dollars (USD). Firms such as banks and importers need to do this every day as part of their business. However, a large proportion of FX trade in the UK is carried out by individuals who want to take advantage of currency price movements to make a profit. 

Individual traders trade forex online using specialist trading platforms or software. These platforms act as their gateway to the interbank market — a network which allows financial institutions around the world to exchange money. 

Because forex has such a huge daily trading volume, the market can be volatile. This means that although FX trading can be incredibly risky, it also has the potential to bring about huge returns, which is an attractive prospect for many traders. 

Traders make a profit when they correctly anticipate a change in price, enabling them to sell an asset for more than they paid for it. In trading, this is known as closing the position

How Does Forex Trading Work In The UK?

Some of the top popular currencies pairs include:

EUR/USD | GBP/USD | AUD/USD | USD/JPY | USD/CAD

Every transaction that occurs on the forex market concerns a currency pair. This is the name that’s given to a pair of currencies which are bought and sold simultaneously: the base currency and the quote currency

Let’s take a look at some examples. The most commonly traded currency pair in the world is EUR/USD (the euro and the US dollar). The second most common is USD/JPY (the US dollar and Japanese yen) and the third most common is GBP/USD

The price of the base currency, which is the first currency in each pair, is known as the bid price. The price of the quote currency, which is the second currency, is known as the ask price. These are usually given to four decimal places, as variations between prices can be very small. 

The difference between the bid price and ask price is referred to as the spread. You can work out the spread by subtracting the bid price from the ask price. Spreads are often incredibly narrow, but because FX trading can concern such huge sums, these tiny spreads can quickly add up to massive profits or losses. 

How To Trade Forex In The UK

Before you can start trading forex in the UK, you’ll need to open an account on your chosen FX platform. The best platform for you will depend on your trading style and risk management strategy. Examples of widely used forex platforms include MetaTrader 4 and 5.

Your choice of platform will be closely linked to your choice of forex broker. Most brokers will either connect you to the platform they use, or offer their own proprietary platform. Once you’ve set up your account and funded it with a deposit, you’re able to start trading. 

→ Click here to start trading forex

That’s the short story. However, to boost your chances of trading successfully, there are a number of key considerations you’ll have to make before selecting your forex broker and platform. To break them down, we’ve created an introductory step-by-step guide on how to start forex trading in the UK. 

Choose Your Forex Trading Style

forex trading style, how to trade forex

In the world of trading, it’s often said that it’s not enough to trust your gut. It can be easy to let your emotions run away with you when there are large sums of money involved, but by developing (and sticking to) your preferred trading style, you can create a considered plan instead of acting on impulse. 

There are four main trading styles, also known as trading plans. Much like choosing your trading platform, the best style for you will depend on your level of experience and your appetite for risk. It will also depend on whether you’d rather trade during the day or overnight.

For related reading, see: How To Find Your Forex Trading Style

Let’s take a look at the most popular forex trading styles in the UK:

Day Trading

Because the forex market isn’t tied to a particular location or time zone, it’s open 24 hours a day, with opening times staggered around the globe. Day trading is a style which involves making a series of short-term trades on the same day. 

This enables investors to take advantage of volatility, but requires them to monitor the market intensively and make quick-fire decisions. As a result, it’s not necessarily suitable for people who aren’t full-time traders. 

However, some investors have got around this by using day trading software which automatically buys and sells based on market fluctuations.

For related reading, see: Day Trading in the United Kingdom

Scalping Trading

Scalping is often considered a variant of day trading. With this strategy, investors typically monitor the market on a 5-minute basis (or less) and hold positions for a matter of seconds or minutes. 

Traders who favour this strategy are known as scalpers. They generally aim to avoid risky trades, as losses from these can erase an entire day’s work.

Position Trading

Unlike day trading, position trading is a long-term style. This makes it a more practical choice for investors who can’t spend all day monitoring the FX market. Position traders make their decisions based on expected uptrends and must weather any dips which occur on a day-to-day or week-to-week basis. 

Swing Trading

Swing trading is an intermediate or medium-term style, so is often seen as the compromise between day trading and position trading. Swing traders aim to profit from price swings, holding positions for as long as a couple of weeks at a time. 

Like position trading, swing trading requires investors to carry out technical analysis. This is the study of past currency prices in order to work out the likelihood of future price swings. 

Because positions are held for so long, it’s important that swing traders can remain calm when the forex market inevitably fluctuates during the holding time. 

For related reading, see: Swing Trading vs Day Trading

Choose Your Forex Trading Strategy

Don’t get a trading strategy confused with a trading style. A trading strategy is simply the method FX investors use to decide how and when they will make trades. A trading style, on the other hand, will take into account your trading timeframe and your money management approach. 

There are hundreds of different forex trading strategies, so it’s common for traders to try out several before they settle on the strategy that works best for them. Examples of popular UK forex trading strategies include trading breakouts, a return-to-mean strategy, the overlapping Fibonacci strategy, and the London hammer strategy

Select Your Currency Pair

If you’re learning how to trade forex for beginners, the best place to start is with one of the major currency pairs. These are the most commonly traded pairs, all of which involve the US dollar. 

There are seven major currency pairs. We mentioned the top three earlier on in this article, so the remaining four are USD/CHF (the Swiss franc) and then the most commonly traded commodity currencies against the USD: AUD/USD, USD/CAD, and NZD/USD. 

A commodity currency is one which fluctuates according to commodities such as gold or oil. This is because the currency is heavily tied to the export of this commodity. 

Further Reading:

Forex Trading Pairs - Top 10 Forex Pairs To Trade

Forex Trading Pairs - How To Trade Exotic Forex Pairs

What Are The Forex Regulations In The UK?

One of the most important steps in your forex trading learning is to understand the regulations which shape FX in the UK. In fact, the UK has some of the most comprehensive forex regulations in the world, with robust laws that are designed to protect you and your money.  

In the UK, forex trading is regulated by the Financial Conduct Authority (FCA). Every UK forex broker must be licensed by the FCA before it can accept UK traders. Always check that your chosen broker is fully regulated before creating an account. Not only will this mean you’re much less likely to get scammed — it also means that your capital will be protected if the broker goes into liquidation.

To be regulated by the FCA, a forex broker must:

  • Have a minimum of £1 million in capital 
  • Submit a number of audit reports and statements 
  • Comply with the Financial Services Compensation Scheme (FSCS). This scheme is designed to protect investors from losing their money if the broker goes bankrupt. 

Will I Need To Pay Tax On Forex Trading In The UK? 

The tax implications of forex trading in the UK depend on various factors. These include the way you trade, your personal income, and whether you’re trading as an amateur or a professional. 

If you’re learning how to trade forex, always talk to a professional tax advisor before you actually start trading. They will be able to tell you how much tax (if any) you’ll have to pay to HMRC. Let’s take a look at some of the rules which could affect you.

Are You A Speculator Or An Investor? 

According to UK law, forex speculators don’t usually have to pay tax on their trading profits. This is because the income they generate is classed as a secondary income, which isn’t taxed until it reaches the tax-free allowance of £12,000. 

Professional forex investors, on the other hand, do have to pay tax if FX trading is their primary source of income. 

Are Your Profits From Spread Betting Or CFDs? 

Spread betting and CFDs (contracts for difference) are forms of financial derivative products. A derivative is a type of security which takes its value from an underlying asset or asset group — in this case, forex. 

Spread betting is when traders speculate on the price direction of a particular currency pair. A CFD is an agreement to compare the price of a currency pair at the start and end of your position and to exchange the difference. 

Spread betting is popular in the UK because it’s completely tax-free. Although profits from CFDs aren’t exempt from tax, any losses you make can be used to offset your capital gains elsewhere. 

If you are required to pay tax on your forex profits, you’ll need to pay it as capital gains tax (CGT) at the end of each UK tax year.

Read More: The Difference Between Spread Betting and CFD Trading

Key Points

  • The UK accounts for more than 40% of the daily forex trading volume
  • Forex can be incredibly volatile, resulting in potentially huge profits and losses
  • Every forex transaction involves a base currency and quote currency
  • You will need an FX platform and broker to start trading forex in the UK
  • There are four key forex trading styles 
  • UK forex brokers are regulated by the Financial Conduct Authority 
  • The amount of tax you’ll pay (if any) will depend on your trading style, your income, and whether you prefer spread betting or CFDs 

Start Forex Trading In The UK

Now you know more about forex trading in the UK, you could be ready to take your interest to the next level. Remember that although it’s easy to get started, finding your favourite trading style and strategy is often a process of trial and error. 

Understanding the forex market can take years of study. However, by reading this article today, you’ve taken your first steps towards becoming a successful forex trader in the UK. the next step is to choose the best Forex trading broker in the UK.

Top Broker in the United Kingdom 

A trader with a eToro account can trade CFDs on underlying financial assets such as Forex, Stocks, Commodities, Cryptocurrencies and Indices. With tight spreads, they are a leading global brand. Voted top broker in UK.

Trade Forex with top rated broker eToro, which has been selected based on its high rating and your location.

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