In 2023, FX trading is worth $1.93 trillion and is the only financial market in the world that operates 24/7 worldwide. However, forex trading can be difficult to understand, especially for those who want to dip their toes into this complex but lucrative market.
In this guide, we cover the ins and outs of FX trading and equip you with the jargon and strategies you need to start your FX trading journey.
What is FX trading?
First things first – what exactly is FX trading? FX trading, also known as foreign exchange trading or simply FX trading, is the exchange of one currency for another. It determines the exchange rate and is one of the most actively traded markets in the world.
Although much of FX trading is carried out for practical purposes such as retail, travel and business, the vast majority is carried out by traders who want to make a profit.
They do this primarily by speculating on the rise and fall of one currency against another. Undoubtedly, forex trading is a high risk and if you’re thinking about getting involved, you need to have a good understanding of how it works.
Should I try forex trading?
It’s safe to say that forex trading is not for the faint of heart. It’s a challenging, yet rewarding endeavour that comes with the emotional rollercoaster of big wins, but also big losses.
Therefore, educating yourself about forex trading through platforms like TraderX is a great way to keep yourself up to date with where the market is going and to make calculated and well-thought-out trading decisions. As Michael Carr said, “Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.”
The basics of currency pairs
FX trading is always carried out in pairs – which means that traders always buy one currency while selling the other. The first currency of the pair is called “the base currency,” while the second is called “quote currency.” A good example of this is the trading of pounds for dollars.
In this case, if you’re speculating that the pound will strengthen against the dollar, you’d buy the GBP/USD pair. Conversely, if there are indications that the dollar will strengthen against the pound, you’d be wise to sell the GBP / USD pair.
In FX trading, the most commonly traded currencies are called the major pairs. These are the EUR/USD (Euro/U.S. dollar), GBP/USD (British Pound/U.S. dollar), USD/JPY (U.S. dollar/Japanese Yen) and USD/CHF (U.S. dollar/Swiss Franc). These four currency pairs are part of the Group of Ten (G10) – which are eleven industrialised countries with similar economic interests.
They’re also the ones that are typically heavily traded for speculative purposes, with the EUR / USD pair being the most popular. Therefore, these pairs are ideal for beginners in FX trading who want to start dipping their toes in the game.
Pips and leverage
In forex, “pip” is the value between two currencies. For example, if we use the GBP/USD pair, the difference between 1.1035 to 1.1036 is a 0.0001 USD rise and therefore one pip. A fractional pip or one-tenth of a pip is called a “pipette.” If a EUR/USD pair moves from 1.21354 to 1.21355, that 0.00001 USD move is considered equivalent to one pipette.
It’s important to note that when FX trading, pip is the quoted price and not the base price. Let’s use the GBP/USD pair as an example. In this case, the pip value is 0.0001 USD. On the other hand, reversing currencies – USD/GBP – means that the pip value is 0.0001. Therefore, if the conversion rate from GBP to USD is 1.23, 1 GBP pip is equivalent to 0.000123 dollars.
Pips are a very important part of forex calculation. A strong understanding of the concept is therefore essential to accurately calculate your profits and losses in an forex trade.
Another important concept in forex trading is leverage, i.e. the amount of money you can spend through capital borrowing. Undoubtedly, leverage increases the potential to increase profits, but it also increases your risk, so it also increases your chances of a major loss. A reduction of a few pips could be detrimental, leading you to lose your money in your trading account.
Different types of FX trades
There are different types of trades that rookie and pro traders can make. This depends largely on your trading style, goals and strategy, but the most common types are:
Spot trading: These types of trading involve buying or selling currency pairs at the current market price. Traders can make a profit or loss depending on the time and price of the pair at the time they buy and sell. In forex trading, this is the most common type of trade.
Forward trading: As the name suggests, this type of trade deals with the future. In this type of trade, traders agree to buy or sell at a future date and at a certain price. The main idea behind this type of trade is that the trader fixes the exchange date in advance and thus avoids exchange rate risk.
Options trading: In forex trading, options trading is a type of trade where you’re given the option, but not the obligation, to buy or sell a currency at a certain exchange rate, at a specific price and date. Unlike other types of trading, options trading allows you to use leverage and deal in currencies without having to commit to buying the currency pair.
How to choose a reliable FX broker
FX brokers can make or break you and your account. Therefore, you need to be extremely careful when choosing a reliable broker.
Think of the forex broker as your intermediary who allows you to speculate on the value of a pair without having to buy the physical currency. Undoubtedly, choosing a good forex broker from the thousands out there is a daunting task. Here are 5 factors you should take into account when committing to a broker:
Regulation
Regulatory compliance should be at the top of your priority list when selecting a broker. The broker you choose must comply with the rules and be recognised by reputable regulatory authorities.
The best forex books state that some of the most popular regulators in the world are the Financial Conduct Authority (FCA) in the UK, the National Futures Association (NFA) in the US and the Australian Securities and Investments Commission (ASIC). A seemingly professional website does not guarantee that the broker is legit – so make sure you do your homework before you pick someone. You’ll thank us later!
Trading platform
A good broker should have a professional trader platform that’s easy to use. The trading platform is the trader’s portal to the markets. Therefore, the trading platform you use must have clear buy and sell buttons, as well as a panic button that closes all open positions. It must also have technical and fundamental analysis tools that facilitate trade.
A poorly designed website leads to many unnecessary mistakes that would otherwise be avoided. Therefore, you need to ask what the broker uses and do your own research to see if this is something you’ll be comfortable with.
Customer Support
Since forex trading is a 24-hour business, 24/7 customer service is a must. A reliable broker must have several people on their customer support team and have various ways to contact them – including, but not limited to, email, phone and live chat. Another important factor is getting an answer quickly, so it’s ideal to check the average waiting times before committing to a broker. This makes a whole world of difference in high-stress situations, as not being able to contact your broker can be detrimental to your business.
Leverage and margin
Depending on the broker you choose, you may have leverage that allows you to open positions larger than your account balance. This can be profitable in certain situations, but it can also lead to enormous losses. Therefore, choosing a broker that offers reasonable leverage and using leverage with caution is a winning combination, as it doesn’t expose you to extreme risk.
Commissions and spreads
Needless to say, forex brokers make money through fees and commissions. A uk stockbroker can take their commission through a percentage of the spread. This refers to the difference between the ask of the forex pair and the bid and brokers make their money with wider spreads. Therefore, it’s important to choose a broker who’s transparent about their fees and commissions to lower trading costs.
Developing a trading plan and demo trading
Trading can be complex and confusing, so a solid trading plan is essential for successful trading. A trading plan should include your goals, risk tolerance, timing, strengths and weaknesses, strategies and exit trades, as well as a risk management strategy that ensures that you have an organised approach from the get-go.
Having a trading plan makes all the difference between huge wins and huge losses, as it can help you stay focused and avoid emotional decisions. It can also help you evaluate your trading performance and adjust your strategy based on hard, cold facts.
Before trading with real money, you can practice your trading skills with a demo account. A demo account simulates a trade environment. However, instead of using real money, you use paper trading to test the waters without risking any money.
Demo trading is great for beginners as it allows you to try different trading strategies and evaluate their performance. Platforms such as WeBull, IG and OKX are some of the most popular demo trading platforms and allow you to trade foreign exchange currencies.
It’s important to keep in mind that, while demo trading is good to start with, it obviously doesn’t replicate the heightened emotions associated with trading that lead to human errors. Therefore, when you actually start trading with real money, you still have to start with small amounts to avoid huge losses.