Forex and money

A forex pair is a combination of two currencies that are traded against each other.

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What is forex and how does it work, forex and money.

There are hundreds of different combinations to choose from, but some of the most popular include the euro against the US dollar (EUR/USD), the US dollar against the japanese yen (USD/JPY) and the british pound against the US dollar (GBP/USD). Alternatively, if you think a pair will increase in value, you can go long and profit from an increasing market.

What is forex and how does it work?

Take a closer look at everything you’ll need to know about forex, including what it is, how you trade it and how leverage in forex works.

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What is forex trading?

Forex trading, also known as foreign exchange or FX trading, is the conversion of one currency into another. FX is one of the most actively traded markets in the world, with individuals, companies and banks carrying out around $6.6 trillion worth of forex transactions every single day.

While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken by forex traders to earn a profit. The amount of currency converted every day can make price movements of some currencies extremely volatile – which is something to be aware of before you start forex trading.

We’re the UK’s number one retail forex provider 7 – with a range of major, minor and exotic currency pairs for you to go long or short on.

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Beginners’ guide to forex: learn currency trading in 6 steps

Forex trading essentials for beginners

What is a forex pair?

A forex pair is a combination of two currencies that are traded against each other. There are hundreds of different combinations to choose from, but some of the most popular include the euro against the US dollar (EUR/USD), the US dollar against the japanese yen (USD/JPY) and the british pound against the US dollar (GBP/USD).

What are the base and quote currencies?

The base currency is always on the left of a currency pair, and the quote is always on the right. The base currency is always equal to one, and the quote currency is equal to the current quote price of the pair – which shows how many of the quote currency it’ll cost to buy one of the base. So, when you’re trading currency, you’re always selling one to buy another.

What is a pip in forex?

A pip in forex is usually a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip. But, if you’re trading JPY crosses, a pip is a change at the second decimal place. A price movement at the fifth decimal place in forex trading is known as a pipette.

What is a lot in forex trading?

Currencies are traded in lots, which are batches of currency used to standardise forex trades. As forex price movements are usually small, lots tend to be very large. For example, a standard lot is 100,000 units of the base currency.

How does forex trading work?

Forex trading works like any other transaction where you are buying one asset using a currency. In the case of forex, the market price tells a trader how much of one currency is required to purchase another. For example, the current market price of the GBP/USD currency pair shows how many US dollars it would take to buy one pound.

Each currency has its own code – which lets traders quickly identify it as part of a pair. We’ve included codes for some of the most popular currencies below.

What does it mean to buy or sell a currency pair?

To buy a currency pair means that you expect the price to rise, indicating that the base currency is strengthening relative to the quote currency. To sell a currency pair means that you expect the price to fall, which would happen if the base currency weakened against the quote.

For example, you’d ‘buy’ the GBP/USD pair if you think that the pound will strengthen against the dollar – meaning you’ll need more dollars to buy a single pound. Or, you’d ‘sell’ this pair if you think that the pound will weaken against the dollar – meaning you’ll need fewer dollars to buy a single pound.

What is the spread in forex trading?

The spread in forex trading is the difference between the buy and sell prices. For example, the buy price might be 1.3428 and the sell price might be 1.3424. For your position to be profitable, you’ll need the market price to either rise above the buy price or fall below the sell price – depending on whether you’ve gone long or short.

What are margin and leverage in FX trading?

Margin refers to the initial deposit you need to commit in order to open and maintain a leveraged position. So, a trade on EUR/GBP might only require a 3.33% margin in order for it to be opened. As a result, instead of needing £100,000 to open a position, you’d only need to deposit £3300.

Why do people trade forex?

Speculating on currencies strengthening or weakening

Traders speculate on forex pairs to profit from one currency strengthening or weakening against another. When the price of a pair is rising, it means that the base is strengthening against the quote and when it’s falling, the base is weakening against the quote.

That’s because a rising price means that more of the quote are needed to buy a single unit of the base, and a falling price means that fewer of the quote are needed to buy one of the base. So, traders would likely go long if the base is strengthening relative to the quote currency, or short if the base is weakening.

Some of the most popular forex trading styles are scalping, day trading, swing trading and position trading. You might choose a different style depending on whether you have a short- or long-term outlook.

Hedging with forex

Hedging is a way to mitigate your exposure to risk. It’s achieved by opening positions that will stand to profit if some of your other positions decline in value – with the gains hopefully offsetting at least a portion of the losses. Currency correlations are effective ways to hedge forex exposure. An example would be EUR/USD and GBP/USD, which are positively correlated because they tend to move in the same direction. So, you could go short on GBP/USD if you had a long EUR/USD position to hedge against potential market declines.

Seize opportunity 24 hours a day

The forex market is open 24 hours a day thanks to the global network of banks and market makers that are constantly exchanging currency. The main sessions are the US, europe and asia, and it’s the time differences between these locations that enables the forex market to be open 24 hours a day.

The forex trading market hours are incredibly attractive, offering you the ability to seize opportunity around the clock. We are also the only provider to offer weekend trading on certain currency pairs, including weekend GBP/USD, EUR/USD and USD/JPY. That means you can trade these combinations when others can’t.

Learn how currency markets work

What moves the forex market?

The forex market is made up of currencies from all over the world, which can make exchange rate predictions difficult as there are many forces that can contribute to price movements. That said, the following factors can all have an effect on the forex market.

Central banks

A currency’s supply is controlled by central banks, who can announce measures that will have a significant effect on that currency’s price. Quantitative easing, for example, involves injecting more money into an economy, and can cause a currency’s price to fall in line with an increased supply.

News reports

Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency. If negative news hits, then demand might be expected to fall. This is why currencies tend to reflect the reported economic health of the region they represent.

Market sentiment

Market sentiment, which often reacts to the news, can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.

How to become a forex trader

Learn the ways to trade forex

There are several ways to trade forex, including trading spot forex, forex forwards and currency options. When you trade with us, you’ll be speculating on the price of spot forex, forwards and options either rising or falling with spread bets and cfds.

Spot forex trading lets you trade forex pairs at their current market price with no fixed expiries

Forex or currency forwards enable you to trade forex pairs at a specified price to be settled at a set date in the future or within a range of future dates

Forex or currency options let you trade contracts that give the holder the right, but not the obligation, to buy or sell a currency pair at a set price, if it moves beyond that price within a set time frame

All of these – spot forex, forex forwards and forex options – can be traded with spread bets and cfds. These are financial derivatives which let you speculate on whether prices will rise or fall without having to own the underlying asset.

What is a forex broker?

A forex broker provides access to trading platforms that can be used to buy and sell currencies. For example, when you trade forex with us, you’ll be able to use our award-winning platform 8 or MT4 – both of which have their own unique benefits.

Forex brokers charge a fee, usually in the form of a spread. This is the difference between the buy (offer) and sell (bid) prices, which are wrapped around the underlying market price. The costs for a trade are factored into these two prices, so you’ll always buy slightly higher than the market price and sell slightly below it.

Traditionally, a forex broker would buy and sell currencies on behalf of their clients or retail traders. But, with the rise of online trading, you can buy and sell currencies yourself with financial derivatives like spread bets and cfds, so long as you have access to a trading platform. This is because all forex trades are conducted over-the-counter (OTC), rather than on exchange like stocks.

Discover the risks and rewards of trading forex

Forex is the most-traded financial market in the world, which means that forex prices are constantly moving, creating more opportunities to trade

Some forex pairs are more volatile than others. Those with low liquidity are often more volatile, including many ‘minor’ pairs

Pairs that include USD are often more liquid because as the world’s reserve currency, USD is often in high demand

Slippage is sometimes an issue in forex trading, given how volatile the market can be. To help mitigate the effects of slippage on your forex trades, you should add stops and limits

But, if you are aware of the risks and take appropriate steps to mitigate your exposure, then the forex market can be the source of your next opportunity

Free forex trading courses and webinars

To succeed when trading forex, you’ll need to take advantage of educational resources and platforms to help you build your confidence. We offer both: IG academy and our demo account.

IG academy has a wealth of information to get you acquainted with the markets and learn the skills needed for boosting your chances of trading forex successfully. Alternatively, you can use an IG demo account to build your trading confidence in a risk-free environment, complete with £10,000 in virtual funds to plan, place and monitor your trades.

We also offer trading strategy and news articles for all experience levels. This includes ‘novice’, like how to be a successful day trader, up to ‘expert’ – looking at technical indicators that you’ve perhaps never heard of.

Once you’ve built your confidence and feel like you’re ready to trade the live forex markets, you can create a live account with us in five minutes or less. You’ll get access to award-winning platforms, 8 expert support around the clock and spreads from just 0.6 points.

Forex trading means exchanging one currency for another. Forex is always traded in pairs which means that you’re selling one to buy another.

There is no difference between forex trading and currency trading, as both mean that you’re exchanging one currency for another. When forex trading or currency trading, you’re attempting to earn a profit by speculating on whether the price of a currency pair will rise or fall.

You can make money from forex trading by correctly predicting a currency pair’s price movements and opening a position that stands to profit. For example, if you think that a pair will decline in value, you could go short and profit from a market falling.

Alternatively, if you think a pair will increase in value, you can go long and profit from an increasing market.

You can get started trading FX with a forex trading account. Plus, you’ll also need to be familiar with what moves the forex market – like central bank announcements, news reports and market sentiment – and take steps to manage your risk accordingly.

The costs and fees you pay when trading currency will vary from broker to broker. But, you should bear in mind that you’ll often be trading currency with leverage, which will reduce the initial amount of money that you’ll need to open a position. Be aware though that leverage can increase both your profits and your losses.

Approximately $6.6 trillion worth of forex transactions take place daily, which is an average of $250 billion per hour. The market is largely made up of institutions, corporations, governments and currency speculators – speculation makes up roughly 90% of trading volume and a large majority of this is concentrated on the US dollar, euro and yen.

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The tax on forex positions does depend on which financial product you are using to trade the markets.

When you trade via a forex broker or through cfds, any gains to your forex positions are taxable. However, your losses are tax-deductible, and depending on your circumstances can also be used to offset gains made elsewhere.

Alternatively, spread bets are a tax-free way to speculate on the forex market. 9

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Despite the enormous size of the forex market, there is very little regulation because there is no governing body to police it 24/7. Instead, there are several national trading bodies around the world who supervise domestic forex trading, as well as other markets, to ensure that all forex providers adhere to certain standards. For example, in the UK the regulatory body is the financial conduct authority (FCA).

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Gaps are points in a market when there is a sharp movement up or down with little or no trading in between, resulting in a ‘gap’ in the normal price pattern. Gaps do occur in the forex market, but they are significantly less common than in other markets because it is traded 24 hours a day, five days a week.

However, gapping can occur when economic data is released that comes as a surprise to markets, or when trading resumes after the weekend or a holiday. Although the forex market is closed to speculative trading over the weekend, the market is still open to central banks and related organisations. So, it is possible that the opening price on a sunday evening will be different from the closing price on the previous friday night – resulting in a gap.

Develop your forex knowledge with IG

Find out more about forex trading and test yourself with IG academy’s range of online courses.

Develop your forex knowledge with IG

Find out more about forex trading and test yourself with IG academy’s range of online courses.

Try these next

Glossary of trading terms

Take a look at our list of financial terms that can help you understand trading and the markets

Risk management

Be aware of the risks associated with forex trading and understand how IG supports you in managing them

Trading platforms

Discover the different platforms that you can trade forex with IG

1 bank of international settlements triannual survey, 2019
2 calculated using figures from the IMF, 2019
3 calculated using the initial contract value for 15 october 2008
4 calculated using data from coin market cap, showing bitcoin’s highest market capitalisation at $835 billion on 7 january 2018
5 calculated using office of national statistics average weekly earnings from Q3 2020
6 calculated using a forbes estimate of jeff bezos’s net worth, october 2020
7 by number of primary relationships with FX traders (investment trends UK leveraged trading report released june 2020).
8 awarded UK’s best trading platform at the ADVFN international financial awards 2020 and professional trader awards 2019.
9 tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

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Spread bets and cfds are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and cfds with this provider. 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. Professional clients can lose more than they deposit. All trading involves risk.

The value of shares, etfs and etcs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.

CFD, share dealing and stocks and shares ISA accounts provided by IG markets ltd, spread betting provided by IG index ltd. IG is a trading name of IG markets ltd (a company registered in england and wales under number 04008957) and IG index ltd (a company registered in england and wales under number 01190902). Registered address at cannon bridge house, 25 dowgate hill, london EC4R 2YA. Both IG markets ltd (register number 195355) and IG index ltd (register number 114059) are authorised and regulated by the financial conduct authority.

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Forex trading: A beginner's guide

Forex is a portmanteau of foreign currency and exchange. Foreign exchange is the process of changing one currency into another currency for a variety of reasons, usually for commerce, trading, or tourism. According to a recent triennial report from the bank for international settlements (a global bank for national central banks), the average was more than $5.1 trillion in daily forex trading volume.

Key takeaways

The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.

Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world.

Currencies trade against each other as exchange rate pairs. For example, EUR/USD.

Forex markets exist as spot (cash) markets as well as derivatives markets offering forwards, futures, options, and currency swaps.

Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among several other reasons.

What is the forex market?

The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. And want to buy cheese from france, either you or the company that you buy the cheese from has to pay the french for the cheese in euros (EUR). This means that the U.S. Importer would have to exchange the equivalent value of U.S. Dollars (USD) into euros. The same goes for traveling. A french tourist in egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the egyptian pound, at the current exchange rate.

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of london, new york, tokyo, zurich, frankfurt, hong kong, singapore, paris and sydney—across almost every time zone. This means that when the trading day in the U.S. Ends, the forex market begins anew in tokyo and hong kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

A brief history of forex

Unlike stock markets, which can trace their roots back centuries, the forex market as we understand it today is a truly new market. Of course, in its most basic sense—that of people converting one currency to another for financial advantage—forex has been around since nations began minting currencies. But the modern forex markets are a modern invention. After the accord at bretton woods in 1971, more major currencies were allowed to float freely against one another. The values of individual currencies vary, which has given rise to the need for foreign exchange services and trading.

Commercial and investment banks conduct most of the trading in the forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.

Spot market and the forwards & futures markets

There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market, and the futures market. Forex trading in the spot market has always been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal." it is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.

Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the chicago mercantile exchange. In the U.S., the national futures association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.

Note that you'll often see the terms: FX, forex, foreign-exchange market, and currency market. These terms are synonymous and all refer to the forex market.

Forex for hedging

Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.

To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell U.S.-made blenders in europe when the exchange rate between the euro and the dollar (EUR/USD) is €1 to $1 at parity.

The blender costs $100 to manufacture, and the U.S. Firm plans to sell it for €150—which is competitive with other blenders that were made in europe. If this plan is successful, the company will make $50 in profit because the EUR/USD exchange rate is even. Unfortunately, the USD begins to rise in value versus the euro until the EUR/USD exchange rate is 0.80, which means it now costs $0.80 to buy €1.00.

The problem the company faces is that while it still costs $100 to make the blender, the company can only sell the product at the competitive price of €150, which when translated back into dollars is only $120 (€150 X 0.80 = $120). A stronger dollar resulted in a much smaller profit than expected.

The blender company could have reduced this risk by shorting the euro and buying the USD when they were at parity. That way, if the dollar rose in value, the profits from the trade would offset the reduced profit from the sale of blenders. If the USD fell in value, the more favorable exchange rate will increase the profit from the sale of blenders, which offsets the losses in the trade.

Hedging of this kind can be done in the currency futures market. The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forward markets, which are decentralized and exist within the interbank system throughout the world.

Forex for speculation

Factors like interest rates, trade flows, tourism, economic strength, and geopolitical risk affect supply and demand for currencies, which creates daily volatility in the forex markets. An opportunity exists to profit from changes that may increase or reduce one currency's value compared to another. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs.

Imagine a trader who expects interest rates to rise in the U.S. Compared to australia while the exchange rate between the two currencies (AUD/USD) is 0.71 (it takes $0.71 USD to buy $1.00 AUD). The trader believes higher interest rates in the U.S. Will increase demand for USD, and therefore the AUD/USD exchange rate will fall because it will require fewer, stronger USD to buy an AUD.

Assume that the trader is correct and interest rates rise, which decreases the AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went long the USD, he or she would have profited from the change in value.

Currency as an asset class

There are two distinct features to currencies as an asset class:

You can earn the interest rate differential between two currencies.

You can profit from changes in the exchange rate.

An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the japanese yen (JPY) and buy british pounds (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "carry trade."

Why we can trade currencies

Currency trading was very difficult for individual investors prior to the internet. Most currency traders were large multinational corporations, hedge funds or high-net-worth individuals because forex trading required a lot of capital. With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.

Forex trading: A beginner’s guide

Forex trading risks

Trading currencies can be risky and complex. The interbank market has varying degrees of regulation, and forex instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.

The interbank market is made up of banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk, and they have established internal processes to keep themselves as safe as possible. Regulations like this are industry-imposed for the protection of each participating bank.

Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is based on supply and demand. Because there are such large trade flows within the system, it is difficult for rogue traders to influence the price of a currency. This system helps create transparency in the market for investors with access to interbank dealing.

Most small retail traders trade with relatively small and semi-unregulated forex brokers/dealers, which can (and sometimes do) re-quote prices and even trade against their own customers. Depending on where the dealer exists, there may be some government and industry regulation, but those safeguards are inconsistent around the globe.

Most retail investors should spend time investigating a forex dealer to find out whether it is regulated in the U.S. Or the U.K. (dealers in the U.S. And U.K. Have more oversight) or in a country with lax rules and oversight. It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent.

Pros and challenges of trading forex

Pro: the forex markets are the largest in terms of daily trading volume in the world and therefore offer the most liquidity. this makes it easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions.

Challenge: banks, brokers, and dealers in the forex markets allow a high amount of leverage, which means that traders can control large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio but not uncommon in forex. A trader must understand the use of leverage and the risks that leverage introduces in an account. Extreme amounts of leverage have led to many dealers becoming insolvent unexpectedly.

Pro: the forex market is traded 24 hours a day, five days a week—starting each day in australia and ending in new york. The major centers are sydney, hong kong, singapore, tokyo, frankfurt, paris, london, and new york.

Challenge: trading currencies productively requires an understanding of economic fundamentals and indicators. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness to grasp the fundamentals that drive currency values.

The bottom line

For traders—especially those with limited funds—day trading or swing trading in small amounts is easier in the forex market than other markets. For those with longer-term horizons and larger funds, long-term fundamentals-based trading or a carry trade can be profitable. A focus on understanding the macroeconomic fundamentals driving currency values and experience with technical analysis may help new forex traders to become more profitable.

What is forex trading and is it right for me?

There are very few investors who have consistently made massive fortunes over a while. Jim simmons, a quiet recluse, has been successful with smaller frequent trades in his medallion fund. On the opposite end of the spectrum is the brash george soros, who publicly “broke the bank of england” and made billions in a single forex trade on black wednesday.

Soros had been building a substantial short position in pounds sterling for months leading up to september 1992. He knew the rate at which the united kingdom was brought into the european exchange rate mechanism (ERM) was too high, their inflation was triple the german rate, and british interest rates were hurting their asset prices.

The british government failed to keep the pound above the lower currency exchange limit mandated by the exchange rate mechanism (ERM). It was forced to withdraw the pound sterling from the ERM, devaluing the pound. The estimated cost to the U.K. Treasury was £3.4 billion. Soros' fund profited from the U.K. Government's reluctance to raise its interest rates to levels comparable to those of other ERM countries or float its currency.

Everyone is familiar with investing in stocks, gold, or real estate. But forex trading has always been shrouded in mystery.

What is forex trading?

Forex trading refers to the foreign exchange markets where investors and traders worldwide buy and sell one currency for another.

You might have even participated in forex trading without even realizing it. Anytime I visit a foreign country, I exchange my U.S. Dollars for the local currency based on the prevailing exchange rate. In its simplest form, that is forex trading.

Currencies rise and fall against each other depending on various economic and geopolitical news. If you can buy low and sell high, you can make a profit in forex trading. Demand for particular currencies can be influenced by interest rates, central bank policy, GDP, and the country's political environment.

Because of forex's global nature, the markets trade for 24 hours a day, five days a week. Forex markets are the most liquid markets in the world.

Forex trading terminology

Forex markets have different terminologies and nuances for trading. Below is the list of most common terms.

Currency pairs

Traders frequently trade currencies by selling one currency and buying another. Forex trading always involves the exchange of currencies in pairs. You could have a EUR/USD pair for U.S. Dollars and euros. You can have similar pairs against the japanese yen or the australian dollar.

The major currency pairs are the four most heavily traded currency pairs in the forex market. Because of the massive liquidity, you can always trade them with the lowest spread. The four major pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF. Note that the U.S. Dollar is involved in every major pair because it is the world reserve currency.

The minor currency pairs don't include the U.S. Dollar and are also known as cross-currency pairs. For example, EUR/AUD and CHF/JPY.

The first currency in the pair is the base currency, and the second currency is the quote currency.

If you are bullish on the european union, you want to buy EUR and sell JPY. In this case, you would buy the EUR/JPY pair.

If you are bearish on the japanese yen, you want to buy USD and sell JPY. In this case, you would sell the JPY/USD pair.

The forex quote determines the price at which you do the buying and selling.

Forex quotes

forex quotes from https://finance.Yahoo.Com/currencies/

The EUR/USD is the currency pair, and the price is 1.2209. The price indicates that for every euro you sell, you could buy 1.2209 USD. The 52 week range indicates that in the last year, the price has fluctuated from 1.07 to 1.22. You make a profit when you sell a currency for more than what you paid for.

You might have noticed the forex quote has four places to the right of the decimal. The smallest price change that a given exchange rate can make is the pip. Most currency pairs, except japanese yen pairs, are quoted to four decimal places. After the decimal point (at one 100th of a cent), this fourth spot is what traders watch to count “pips.”

For example, if the EUR/USD moves from 1.2202 to 1.2205, we say the EUR/USD has increased by three pips.

Forex lot

Forex is traded in lot sizes. Standard lot = 100,000 units mini lot = 10,000 units micro lot = 1,000 units

A larger lot size involves more risk due to the amount of money involved. If you are starting, always trade in micro-lots.

Leverage

Forex traders often use leverage to juice up the returns. Since currencies trade in a small range, they want to amplify their gains. The challenge of leverage is that it cuts both ways. If you are right, then using a 50:1 leverage will increase your profits by 50 times. However, if you are wrong, then you lose 50 times more. For this reason, it is advisable to avoid using leverage when trading forex.

Can you get rich by trading forex?

Forex investors make money by deciding what currencies will rise and fall. Some traders swear by technical analysis and others will rely on fundamental analysis. Traders believe they know what direction the currency would move based on the latest news. The challenge with making money trading is that the same information is also available to everyone else, including professional investors.

An individual investor who is not involved with trading the forex market for a living would find it very hard to make money. You could get lucky once or twice. But eventually, your steak runs out.

The individual investor has no advantage over professionals who do this for a living. My four worst investments article highlights how easy it is to lose money when trading against professional investors.

Professional traders have powerful trading tools to take advantage of their online forex trading strategy. The trading platforms provide signals for automated trading and scalping. Forex scalping methods place trades for 1 to 10 minutes and close positions after gaining five pips. An algorithmic trading system combined with leverage enables the professional traders to day trade forex pairs better than individual investors.

If you want to grow rich and retire early, the best plan is to accumulate income-producing assets. Most stocks pay a dividend, or they increase in value like moonshot stocks. The rental property provides income in the form of rent and appreciating property prices.

Forex trading only makes money if you are right in the timing and direction of currency prices change. You cannot have a “buy it and watch it grow” approach with forex. If you wonder, “when can I retire” it is quite likely that forex trading won't help you.

Who does forex trading

Professional investors trade forex to make money. Trading is done in the spot market, where exchange rates are determined in real-time depending on the current economic and geopolitical factors.

Global companies actively trade forex as well in the futures market. They create a contract to buy or sell a predetermined amount of a currency at a specific exchange rate at a date in the future. The primary purpose is not speculation but as a hedge.

For example, infosys (NYSE: INFY) is a consulting company headquartered in india, but they have clients worldwide. They report results on the indian stock exchange. Since the indian rupee trades in a wide range against the U.S. Dollar, infosys would use the forex markets to hedge against currency risk.

Similarly, ARAMCO (SAUDI-ARAMCO) is one of the leading players in the petroleum and natural gas industry. It needs to hedge its commodity exports against price changes in U.S. Dollars.

Final thoughts on forex trading

Forex is part of our everyday life as a result of living in an interconnected global economy. Currencies usually trade in a tight band. If a currency suddenly depreciates, it could be an indicator of upcoming inflation or potential geo-instability.

It is tough to get rich with forex trading for individuals. You might lose all your investment. To be profitable, one needs a deep understanding of the macroeconomic fundamentals driving currency values coupled with technical analysis experience. And it would help if you traded on it before anyone else does. Proceed with caution if you decide to incorporate forex trading as part of your investment strategy.

What is the spread in forex and how do you calculate it?

Every market you can trade with us has a spread, which is the primary cost of trading. Learn more about a forex spread, including what it is and how it’s calculated.

What is the spread in forex?

The spread in forex is a small cost built into the buy (bid) and sell (ask) price of every currency pair trade. When you look at the price that’s quoted for a currency pair, you will see there is a difference between the buy and sell prices – this is the spread or the bid/ask spread.

Changes in the spread are measured by small price movements called pips – which is any change in the fourth decimal place of a currency pair (or second decimal place when trading pairs quoted in JPY). It is not only the spread that will determine the total cost of your trade, but also the lot size.

Remember, every forex trade involves buying one currency pair and selling another. The currency on the left is called the base currency, and the one on the right is called the quote currency. When trading FX, the bid price is the cost of buying the base currency, while the ask price is the cost of selling it.

With us, you can trade forex using derivatives like spread bets and cfds, 24 hours a day. Derivative products enable you to take a position on forex without taking ownership of the underlying asset. You can go long or short, which means you can speculate on rising as well as falling currency prices. And, you only need a small deposit – called margin – to open your position.

The margin on a forex trade is usually only 3.33% of the value of the trade, which means you can make your capital go further while still getting exposure to the full value of the trade. Note, while margin can magnify your profits, it will also amplify any losses.

How to calculate the spread in forex

To calculate the spread in forex, you have to work out the difference between the buy and the sell price in pips. You do this by subtracting the bid price from the ask price. For example, if you’re trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips).

Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread. Traders often favour tighter spreads, because it means the trade is more affordable.

If a market is very volatile, and not very liquid, spreads will likely be wide, and vice versa. For example, major currency pairs such as EUR/USD will have a tighter spread than an emerging market currency pair such as USD/ZAR. However, spreads can change, depending on the factors explained next.

Why does the spread change in forex?

The spread in forex changes when the difference between the buy and sell price of a currency pair changes. This is called a variable spread – the opposite of a fixed spread. When trading forex, you will always deal with a variable spread.

The forex spread may increase if there is an important news announcement or an event that causes higher market volatility. One of the downsides of a variable spread is that, if the spread widens dramatically, your positions could be closed or you’ll be put on margin call. Keep an eye on our economic calendar to stay abreast of upcoming financial events.

Forex trading platforms

There are a range of forex trading platforms to choose from, including our award-winning platform, MT4 or an MT4 VPS. Each of these platforms will show the forex spreads up front.

Our trading platform

Our trading platform has been voted the best in the UK,i and you can use it to trade over 80 currency pairs including majors like EUR/USD and GBP/USD, and minors like CAD/JPY and EUR/ZAR. Our minimum forex spreads start at 0.6 for EUR/USD and AUD/USD.

You’ll also get in-platform news and analysis from our expert team and reuters, as well as technical indicators like moving averages and relative strength index (RSI) to help you conduct technical analysis.

Metatrader 4

Metatrader 4 (MT4) is an automatable forex trading platform, and it has been popular with forex traders for over 15 years. When you create an MT4 account with us, you’ll get access to MT4 and our full range of MT4 forex markets, as well as a number of free indicators and addons to help you conduct analysis and customise the platform. Our minimum MT4 forex spreads start at 0.6 on EUR/USD.

We also offer an MT4 VPS, which offers low latency and reliable uptime – meaning you’re sure to get fast execution. Our MT4 VPS is hosted by beeks in london, and it’s the fastest, most reliable VPS on the market.

Forex spread summed up

A forex spread is the primary cost of a currency trade, built into the buy and sell price of an FX pair

A spread is measured in pips, which is a movement at the fourth decimal place in a forex pair’s quote (or second place if quoted in JPY)

To calculate the forex spread, subtract the buy price from the sell price

Forex spreads are always variable, whereas other markets’ spreads may be fixed

Spreads can either be wide (high) or tight (low)

Traders often favour tighter spreads, because it means the trade is more affordable

If a market is very volatile and not very liquid, wide spreads may occur

If a market has high liquidity but is not very volatile, tighter spreads may occur

Factors like important news announcements or an event that causes higher market volatility can cause spreads to change

Publication date : 2020-11-27T13:26:03+0000

This information has been prepared by IG, a trading name of IG markets limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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Five tips for successful forex money management

Forex money management is something that many people overlook in their trading. Whether it is through lack of knowledge or idleness, traders who ignore money management do so at their detriment. This is one of the key factors that distinguishes a successful trader from an unsuccessful one.

But what is it exactly? Why is it so important? And how can you make sure you use it in your trading? In this article, we will provide answers to all these questions and more.

What is forex money management?

Simply put, forex money management is a set of self-imposed rules successful traders follow in order to manage their money effectively; minimising losses, maximising profits and growing the size of their trading account.

Forex money management is often, and understandably, confused with risk management, as they are fairly similar concepts. Risk management is more about identifying, analysing and quantifying all the risks associated with trading in order to manage them effectively and, in doing so, protect yourself from the downsides of trading. Money management just focuses on protecting your money.

An old trading adage helps to sum up the purpose of money management "cut your losses short and let your winners run". In other words, minimise loss, maximise gains and hopefully, by doing so, become a successful, profitable forex trader.

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Top tips for successful money management

We know that, especially as a new trader, there is a lot to take in and learn when it comes to the forex markets. Therefore, in order to make things easier for you, we have compiled a list of our top tips in order to help you come up with a successful system for your forex money management.

Trade only what you can afford to lose

Our first tip, and probably the most important for any trader, is to only trade what you can afford to lose. As a beginner trader, you should only deposit what you can afford to trade with into your trading account and no more.

You might want to set yourself a maximum acceptable loss per month and if you hit that loss, stop trading. The idea is that you are only risking capital that will not drastically change your life if you lose it. Do not ever trade with the money you need for essentials; rent, mortgage payments, food, travel to work, etc.

Forex trading is not a guaranteed money maker. Some people will end their forex trading career only having made losses. Do not risk what you cannot afford.

Quantify your risk per trade

Once you have decided on an amount of money you are happy to trade with, you need to establish how much you are going to risk per trade and how you are going to measure this. This will help determine where you will place your stop loss for each trade.

There are two common ways of quantifying your risk, each with its advantages and disadvantages.

1. A fixed sum

Some traders set their maximum risk per trade as a fixed monetary amount. For example, a trader may deposit £10,000 into their trading account and establish that they will risk £500 per trade.

This is a very easy rule to follow. For each trade, regardless of what it is, you know exactly how much you are going to risk. If you make 10 trades a day, you know without doing much calculation, that the maximum you will risk is £5,000.

The disadvantage with this strategy is that it does not take into account any changes in your trading balance. If you go on a series of wins and grow your account substantially, but still stick to the same risk per trade, you could be missing out on greater returns.

On the other side of things, if you lose a lot of trades but your risk per trade remains £100, you are risking a higher proportion of your account balance, which could lead to your balance depreciating a lot more quickly.

2. A fixed percentage

The most common approach is to risk a fixed percentage of your account balance on each trade. Therefore, if a trader has an account balance of £10,000 and they decide they want to risk 2% of their capital per trade, the first trade would risk £200.

The benefit of utilising this method is that, unlike having a fixed sum, your risk per trade will fluctuate along with your account balance. In theory, if it is stuck to, you could never blow your account balance and when you are on a winning streak, your risk is increased in order to take advantage of the higher amount of capital at your disposal.

The disadvantage here is that, if you do sustain a series of losses, your risk per trade will get smaller and smaller along with your balance. This means that, if, and when, you start to win trades, it will take you longer to make back your capital.

Establish your risk to reward

Now you know how much you intend to risk per trade, establish how much you are aiming to profit from that risk and use this to help place a take profit for your trades.

This choice will be dependent on your strategy and your trading profile, specifically your appetite for risk. A risk to reward ratio of 1:1 would mean, for example, that if your maximum acceptable loss is $100 your profit target would also be $100. A ratio of 1:3, however, for the same amount of risk would give a target profit of $300.

It is generally accepted that a risk to reward ratio should be higher than 1:1. This is because, if you won three trades in a row and then lost three trades in a row, and your risk to reward ratio was 1:1, you would have made a total profit of £0.

Whereas, if you were trading with a risk to reward ratio of 1:2, and you had three wins followed by three losses, because your profit was higher than the losses of each trade, you would still be in profit.

Depicted: admiral markets metatrader 5 - GBPUSD H1 chart. Date range: 6 november 2020 - 11 november 2020. Date captured: 11 november 2020. Past performance is not necessarily an indication of future performance.

Respect leverage

Leverage allows forex traders to open larger positions than their capital would otherwise allow. Essentially, the trader borrows money from their broker to open a leveraged position. For example, if a trader has leverage of 1:20, they could open a position worth £10,000 with just £500 in their account.

This sounds like a great deal and, if used correctly, it can be incredibly helpful in becoming a profitable trader.

Because it allows you to access a larger position with less money, leverage can amplify the profit of a winning trade.

However, and this is important, leverage is a double edged sword. Those magnified profits on winning trades become magnified losses on losing trades. Therefore, it is important to use leverage with respect and care.

Withdraw profit

Something that many traders are guilty of is never withdrawing their profit, or not doing it regularly enough.

If you start to make a sizable amount of profit on your trading account - take it out, enjoy it, do something worthwhile with the money.

As we said at the beginning, part of forex money management is maximising your profit. In order to do this, you need to look after your profit when there is one. The longer the money sits in your trading account, the more likely you are to trade with it and possibly lose it.

Final thoughts

These five tips for successful forex money management should stand you in good stead when starting up as a trader. Remember to stick to your rules once you have established exactly what they are. For example, you may decide to write down the something like the following as part of your overall trading plan:

I will not risk more than 3% of my account balance on any one trade

My preferred risk to reward ratio is 1:2 per trade

My accumulated losses for the week will not exceed £2,000. If I reach this target, I will stop trading for the week

As with anything in life, the best way to perfect money management and forex trading is by practicing. With admiral markets, you can do this on a demo account, absolutely free.

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About admiral markets

Admiral markets is a multi-award winning, globally regulated forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: metatrader 4 and metatrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Trading money: FOREX, cryptocurrency, or both?

Investors have no shortage of vehicles into which to put their money. There are stocks and bonds, commodities, real estate, and other opportunities. Investors who prefer to trade money itself can invest in different currencies by way of the FOREX market. Cryptocurrency is yet another option.

For money traders, investment decisions often come down to deciding between FOREX and crypto trading. Evangelists in both camps push their preferred option over the other. Smart investors do not take sides. They understand that both FOREX and crypto trading have their pros and cons. They are willing to at least look at both opportunities, if not actually invest in both.

Fiat currency vs cryptocurrency

Before investors ever get to decide what to trade, they have to understand the fundamental difference between fiat currency and cryptocurrency. FOREX (foreign currency exchange) trading involves trading the 180 fiat currencies recognised as legal tender by their relevant government authorities. The euro, US dollar, and british pound are all examples of fiat.

Cryptocurrency is a digital currency created by computer software. It is not considered legal tender in any country in the world, with one or two exceptions. Venezuela comes to mind, though their national cryptocurrency might just as well not be legal tender as it has virtually no value.

Among the many differences between fiat and crypto, the most significant is issuing authority. Fiat currencies are created and issued by central banks and backed by central governments. Cryptocurrencies are created and issued by private organisations. As such, they are not protected by law. When you trade in cryptocurrency, you are at the mercy of the rest of the crypto community with an interest in that particular asset.

How currencies are traded

The actual process of trading currencies differs between FOREX and crypto. Currencies are traded on the FOREX market through software platforms similar to those used by securities traders. Trading platforms for currency traders are plentiful, and some platforms are easier to use than others. Essentially, you log on to your chosen platform where you can do research, track prices, and initiate buy and sell orders.

Trading cryptocurrency is a bit more complicated, although it is not hard. To trade, you need to have an account on a cryptocurrency exchange. Like cryptocurrencies themselves, exchanges are privately run organisations that are only loosely regulated in most countries.

Crypto trading can be done in one of two ways. The first option is a straight-up buy or sell that is no different from e-commerce. The exchange lists a price and you buy at that price. The same goes for selling. The second option is to trade the same way fiat currencies are traded. This involves tracking prices and initiating buy and sell orders.

Successful trading in both markets is not a matter of chance. Traders have to stay abreast of market conditions in the short term. They also need to be able to look toward the future in hopes of anticipating what might be coming.

Trading volatility

Both FOREX and cryptocurrency trading share one primary characteristic: volatility. Despite how currency values are determined – FOREX pricing is determined by pairing one fiat with another while all cryptocurrencies are valued in US dollars – both types of trading are subject to huge market swings.

The price of a given currency can be sky-high today and rock-bottom tomorrow. It doesn’t take much, either. For example, movement in unemployment numbers can affect fiat and cryptocurrencies. Major events, like unrest in the middle east, can send prices tumbling. Trading in either asset is not for the faint of heart. You have to be willing to endure the volatility if you expect to make money.

Taxes and fees

One last thing to consider about FOREX and cryptocurrency trading are those costs incurred via taxes and fees. Both types of trading are subject to fees. Trading platforms charge fees, usually on both sides of the transaction. In other words, both buyers and sellers pay a fee as a percentage of the transaction. Some platforms also charge a flat fee on top of the percentage cut.

Fees in the FOREX market tend to be more comparable from one platform to the next. This is likely due to the fact that FOREX trading is heavily regulated to the extent that all trading platforms exist on a level playing field. There is less stability in cryptocurrency fees. A lack of crypto regulation lets the exchanges in some countries do as they please.

The one advantage FOREX trading has is taxation. Profits from FOREX trading are not taxed in most countries. This is largely due to the fact that currencies are not considered securities. Traders are making money simply by taking advantage of exchange rates. Most central governments do not see the results of such trading as profits.

On the other hand, most central governments view cryptocurrencies as securities. They are classified as no different than stocks, bonds, etc. For tax purposes. Thus, profits from cryptocurrency trading are generally taxed under capital gains regimes.

When you take all this into consideration, the differences between FOREX and cryptocurrency trading are not as drastic as they might seem. There is no need to choose one over the other; you can trade in both and do very well. You just have to be cautious and never stop learning.

So, let's see, what we have: forex trading explained. Forex is the conversion of one currency to another. Find out how FX markets work and what forex trading involves. At forex and money