As forex trading has grown in popularity over the last few years, it’s no surprise that more and more individuals have been looking towards the world’s largest financial market, the Foreign Exchange, to increase their chances of making a profit from their trading endeavours. While not every trader will see success (nor will every trade be successful), the Forex market could be a worthwhile place to get started.
What is Forex trading?
The foreign exchange is a central hub where a host of buyers and sellers go when they want to transfer currencies at an agreed price (this can include individuals, companies and even central banks).
With this in mind, you will see that it is used primarily for practical transactions, but it is becoming more and more common for traders to use this platform to make a profit from the price differences in a host of currencies. As trading volume is high, the market itself can be extremely volatile and this is typically what makes the market so attractive to traders.
How does the Forex market work?
Forex functions a little differently from other trading methods, like shares, in the sense that trades aren’t undertaken on the foreign exchange itself; they are made directly between the parties involved instead. These trades are performed in what is known as an over-the-counter, or OTC, market. This is open 24 hours a day, five days a week, and there are four major trading centers, London, New York, Sydney and Tokyo, that span different time zones.
Traders often speculate on the price movements in currency pairs and simultaneously buy one currency while selling another to make a profit from the difference. When looking into Forex trading, you may have come across the term ‘pips’ and this is the name given to the units used when measuring exactly how great these movements/price differences are at any given time.
Trading platforms like CMC markets are regulated by the FCA (Financial Conduct Authority) help to facilitate trades and it can be simple to sign up and get trading with little fuss.
What is a base and quote currency?
To successfully trade Forex, you will need to understand what base and quote currencies are. The base is the currency listed first and the quote is the currency that comes second. The aim is to work out how much one unit of the base currency is worth in the quote currency and buy/sell when the price is right. If the base value rises higher than the quote value, traders will go long (and buy) and if it drops traders will go short (and sell).
The currency pairs typically traded on are as follows:
Major pairs, which include:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- USD/CAD
- AUD/USD
Read Also: Best 10 forex pairs to trade
Minor pairs, which include:
- EUR/GBP
- EUR/CHF
- GBP/JPY
Regional pairs, which include:
- EUR/NOK
- AUD/NZD
- AUD/SGD
Exotics, which include:
- USD/PLN
- GBP/MXN
- EUR/CZK
Is it time to start trading Forex?
Now that you understand Forex trading a little better, you might be thinking about getting into the niche yourself. The good news is that the right broker can offer all the tools, features, support and educational resources you need to get set up.
It can be worthwhile to do some significant research, practice trading on a demo trading account (most reputable platforms will facilitate this), follow market news and insights and consider leveraged trading if you don’t have too much starting capital (again, do some research to ensure that you fully understand the risks that can come with this).
Always practice risk management to ensure you minimise your potential for losses and remember that the Forex market is extremely volatile and profitable trades are not guaranteed, so never put forward more money than you can afford.
How to trade the Forex markets
1. Select a broker
It will always be worthwhile to learn the ropes before you put your money on the line, so don’t start trading until you’ve chosen a reputable broker like CMC markets, done some worthwhile research and practiced on a demo trading account.
The time you spend educating yourself will pay off in the long run, so dedicate some time now, before it’s too late. Read the news, familiarise yourself with market trends and perform some market analysis while you practice trading - and when the time comes to deposit and trade with real funds, you’ll be better equipped to spot the positions with the most potential.
2. Always start small
Now that you’ve put in the effort to understand all you can about trading Forex and have got some practice in, it’ll be time to start trading for real. This is the point where many individuals find out whether they’re cut out for a life trading the Forex market - and one of the biggest reasons many fail is because they go in too high, experience a loss and decide it’s not for them. The best way to trade Forex is to start off small and only take up positions with minimal outlay. Once you get a feel for everything, you can begin to increase the value of the trades you take on and track your profits and losses to ensure you’re making good decisions.
3. Consider using leverage
Many Forex trading platforms partner with reputable brokers to maximise the trading potential for their users. Leverage is where a broker will offer you a loan to speculate on price movements and you will be expected to put forward a margin amount. This can allow traders will little funds to go in on more expensive trades, but does come with additional risks (namely that losses will be taken across the entire spread, and not just on the amount you personally put in). When done correctly however, there can be some worthwhile profit potential.
4. Remember that not every trade will be successful.
Whether you are new to trading Forex or have been in the niche for quite some time, it can be easy to overlook the fact that losses will happen. No trader has ever been 100% successful, so the key is to minimise losses where possible, so you always stay in profit at the end of the day (or week/month).
A good risk management strategy can be one of the top ways to ensure you only ever go into the red by small amounts (if at all), so don’t forget to place stop-loss limits, set a trade allowance, perform consistent market analysis and only ever set a small percentage of the money you’ve set aside for trading on any given position.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.