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Discover how the world’s largest and most liquid financial market operates. We explain how international currencies are traded and give you the key facts you need to know before you enter this popular market.
|Forex essentials||Forex markets||Forex trading||Ways to trade forex|
|What is forex?Why trade forex?How a forex trade worksForex trade exampleGoing long and shortForex pricingPoints and pips||Currency pairsWhat drives the forex market?||Where can I trade forex?When can I trade forex?LeverageTom-next||FX tradingCFD trading|
Forex is an over-the-counter (OTC) market. This means that currencies are exchanged directly between two parties rather than through an exchange.
The forex market is run electronically via a global network of banks – it has no central location, and trades can take place anywhere via a forex broker of your choice.
You can also trade forex CFDs with IG. We offer all our forex contracts commission free, so the only fee you need to pay is the dealing spread. And with margins starting from just 0.5% of the contract value, you can gain exposure to the markets without tying up too much of your capital.
To find out more about trading CFDs with IG, visit our CFD trading module.
You can buy and sell currencies continuously through most of the week. The exact times depend on your location. In Australia, for example, you can trade forex from Monday morning to Saturday morning (the exact times vary with clock changes throughout the year).
The trading day begins in New Zealand and Australia, then moves around the world through Japan and Europe to the USA, with the New Zealanders taking over again as the Americans close down for the night.
Leverage is a facility that lets you make a large trade while only tying up a small amount of your capital.
Rather than paying the full value of your position, you give the broker a deposit representing a proportion of the overall trade. For example, your broker might let you trade on a 50:1 margin. This would mean that putting down a sum of £1000 would give you the same exposure as an investment of £50,000.
Because currency prices often move by very small percentages during a typical trading day, when there are no major news events, forex offers one of the highest rates of leverage. This enables investors to realise large profits and losses even though the market has moved by only a small amount.
It’s important to remember that leverage exposes you to the risk that you might lose more than your initial margin. Learn how to trade safely in our managing risk section.
When you hold a forex position open beyond the end of a trading day, an overnight adjustment known as tom-next (tomorrow-next day) applies.
Tom-next is particularly relevant when you’re trading forex derivatives for speculative purposes, to avoid taking physical delivery of the currency you’re trading. Delivery would normally be due two days after the transaction, so if you want to hold your position for more than a day the tom-next market mechanism is applied to delay delivery.
Effectively, your provider will swap your contract for a new one which begins the next day, applying a tom-next adjustment to the position in the process.
To calculate the tom-next rate, the closing level of the previous position is taken into account, plus or minus an adjustment for interest. The difference between the interest rates of the two currencies determines whether you receive or pay interest. If you are buying a higher-interest-rate currency you will receive interest payments, while buying a lower-interest-rate currency means you will have to pay interest. This is known as the cost of carry.