How to trade forex
When you learn how to trade FX, it's not hard to see why it is such a popular market among traders. You’ll discover there’s a huge number of different currency pairs to trade – from majors to emerging currencies to exotics – 24 hours a day. Learn how to trade forex using CFDs, how the forex market works and see an example of a forex trade.
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Forex trading steps
Learning how to trade any market can seem daunting, so we’ve broken forex trading down into some simple steps to help you get started:
- Decide how you’d like to trade forex
- Learn how the forex market works
- Open an account
- Build a trading plan
- Choose your forex trading platform
- Open, monitor and close your first position
Decide how you’d like to trade forex
A lot of forex trading takes place between major banks and financial institutions, which buy and sell massive amounts of currency every single day. For individual traders who don’t have the means to make billion-dollar forex trades, though, there are two main ways to get involved: forex CFDs or trading forex via a broker.
What is a forex CFD?
A forex CFD is a contract in which you agree to exchange the difference in price of a currency pair from when you open your position to when you close it. Open a long position, and if the currency pair increases in price you’ll make a profit. If it drops in price, you’ll make a loss. Open a short position, and the opposite is true.
Forex trading via a broker
Forex trading via a broker – or sometimes via a bank – works in a broadly similar way to CFD trading. You’re speculating on the price movements of currency pairs, without actually taking ownership of the currencies themselves. If you think a currency pair’s price is headed down, you can go short instead of long.
When you trade forex via a broker, though, you won’t have access to other markets.
Learn how the forex market works
One of the first things to learn when you want to trade currencies is how the forex market operates, which is very different to exchange-based systems such as shares or futures.
Instead of buying and selling currencies on a centralised exchange, forex is bought and sold via a network of banks. This is called an over-the-counter, or OTC market. It works because those banks act as market makers – offering a bid price to buy a particular currency pair, an ask price to sell a forex pair.
Trading via forex providers
Most retail traders won’t buy and sell forex directly with one of the major banks – they’ll use a forex trading provider. Forex trading providers deal with the banks on your behalf, finding the best available prices and adding on their own market spread.
Some providers will allow you to interact directly with market makers’ order books. This is called direct market access, or DMA, and means advanced traders can buy and sell forex without the spread – instead trading at the prices offered by currency providers, plus a variable commission.
Open an account
If you want to trade forex via CFDs, you’ll need an account with a leveraged trading provider.
You can open an IG Bank account with a few simple steps, and there’s no obligation to add funds until you want to place a trade.
Build a trading plan
Building a trading plan is particularly important if you’re new to the markets. A trading plan helps take the emotion out of your decision making, as well as providing some structure for when you open and close your positions. You might also want to consider employing a forex trading strategy, which governs how you find opportunity in the market.
Once you have chosen a particular forex trading strategy, it’s time to apply it. Use your favoured technical analysis tools on the markets you want to trade and decide what your first trade should be.
Even if you want to be a purely technical trader, you should also pay attention to any developments that look likely to cause volatility. Upcoming economic announcements, for instance, might well reverberate across the forex markets – something your technical analysis might not consider.
Choose your forex trading platform
Our trading platforms can provide you with a smart and faster way to trade forex. You can trade via the IG trading platform in:
- Your web browser
- One of our mobile apps
- Advanced third-party platforms like MT4
Each of our forex trading platforms can be personalised to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.
Open, monitor and close your first position
Once you have chosen your platform, you can start trading. Just open the deal ticket for your chosen market, and you’ll see both a buy and a sell price listed. You’ll also be able to decide the size of your position and add any stops or limits that will close your trade once it hits a certain level. Hit buy to open a long position or sell to open a short position.
You can monitor the profit/loss of your position in the ‘open positions’ section of the dealing platform.
Once you’ve decided it’s time to close your position, just make the opposite trade to when you opened it. Now, let’s take a look at some examples of forex trades and their possible outcomes.
Forex trading example
Trading a USD/CHF CFD
USD/CHF is trading at 1.01932, with a buy price of 1.01939 and a sell price of 1.01924, giving it a spread of 1.5 points. You think that the dollar is set to gain value against the franc, so you decide to buy the market at 1.01939.
The size of a CFD position is measured in contracts, with each contract equal to a single lot of the base currency in the pair. In this case, buying a single USD/CHF CFD is the equivalent of trading $100,000 for CHF 101,939. You decide to buy three CFDs, giving you a total position size of CHF 305,817 ($300,000). This means you’ll earn CHF 30 for every point of movement
CFDs are a leveraged product, so you don’t have pay the full value of your position upfront. USD/CHF has a margin factor of 1.5%, so you’ll need to commit CHF 4,587.26 as margin.
If your prediction is correct
The dollar rises against the franc, and USD/CHF is now trading at 1.02176, with a buy price of 1.02184 and a sell price of 1.02169. You reverse your trade to close your position, so you sell three contracts at 1.02169.
Your $300,000 is now worth CHF 306,507, because 1.02169 x (100,000 lot size x 3 CFDs) = CHF 306,507. CHF 306,507 – CHF 305,817 = CHF 690, which is your profit from the trade. You could also calculate this as 10216.9 – 10193.9 = 23 points, which you multiply by CHF 30 per point to get CHF 690.
As ever, you’d have had to pay funding charges if you kept your position open overnight.
If your prediction is wrong
The dollar falls against the franc, and USD/CHF is trading at 1.01676, with a buy price of 1.01684 sell price of 1.01669
1.01669 x (100,000 lot size x 3 CFDs) = 305,007, which means your three contracts are now worth CHF 305,007, CHF 810 less than when you opened your position. Another way to calculate this is to subtract 10166.9 from 10193.9, which gives you a loss of 27 points. 27 x 30 francs per point = CHF 810.
Additionally, you will have paid funding charges if you held the position overnight.
How much money do I need to start trading forex?
To start trading forex, you’ll need to make sure there is enough capital in your trading account. Unlike the stock market, there is no enforced minimum. This means that your required capital can be based on your goals and trading style, but it is often suggested that traders shouldn’t risk more than 1% of their account on each trade. For example, if your account contains CHF 20,000, then you may decide not to risk more than CHF 200 on a single trade.
What do I need to start trading forex?
Once you have established how much capital you have available, you will then need to start preparing the rest of your forex trading plan – this should include when you want to get out of trading forex, the time you are willing to commit to trading, researching which markets you want to trade, your risk management strategy and your trading strategy.
Can anyone trade forex?
Whether you’re completely new to trading or have traded other markets before, the volatility of the forex market is a very unique environment that takes time to understand. However, anyone can trade forex if they develop their trading knowledge, build a forex trading strategy and gain experience trading the market.
What is a good forex trading strategy?
A forex trading strategy should take into account the style of trading that best suits your goals and available time. For example, day trading is a strategy that involves opening and closing positions within a single trading day, taking advantage of small movements in the price of a currency pair. On the other hand, position trading is the strategy of holding positions open for a longer amount of time to take advantage of major price movements. Both have different time commitments and different techniques needed for success.
What currency pairs move the most?
The nature of the forex market is extremely volatile, so a currency pair that moves a lot one week, might show very little price movement the next. However, the majority of forex trading volume is found on a handful of forex pairs, including EUR/USD, UDS/JPY, GBP/USD, AUD/USD and USD/CHF – because these pairs attract the most traders, they often see the most movement.
If you want to keep up to date with the most recent forex price movements, visit our news and trade ideas section.
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