The best beginners' guide to buying and selling forex
Forex is one of the most actively traded markets in the world – with a daily average trading volume of more than $6 trillion. Learn how and when to buy and sell forex online with our beginners’ guide.
What is buying and selling in forex?
Buying and selling in forex is speculating on the upward and downward price movements of a currency pair, with the hopes of making a profit. All forex trading involves buying one currency and selling another, which is why it is quoted in pairs. You would buy the pair if you expected the base currency to strengthen against the quote currency, and you would sell if you expected it to do the opposite.
The price of a forex pair is how much one unit of the base currency is worth in the quote currency. For example, if the price of GBP/USD is 1.32000, it means that £1 costs $1.32.
Can I sell forex without buying?
Yes, you can sell forex without buying – this is known as short-selling, or going short. Short-selling a currency means that you believe that its price will fall, so you ‘sell’. The more the price falls, the more profit you will make.
For example, assume GBP/USD is trading at 1.3200, with a buy price of 1.3201 and a sell price of 1.3199. You think that the currency price will fall, so you short-sell the pair at 1.3199. If USD strengthens against GBP – meaning fewer US dollars are needed to buy a single pound – of the price of GBP/USD will fall, and you’ll make a profit.
How to buy and sell currency pairs
Follow these steps to buy and sell currency pairs:
- Decide how you’d like to trade forex: there are two main ways to get involved: spot forex or trading forex via a broker
- Learn how the forex market works: forex is bought and sold via a network of banks. This is called an over-the-counter (OTC) market
- Open a trading account: you can open a forex trading account with us in minutes, and there’s no obligation to add funds until you want to place a trade
- Build a trading plan: a trading plan helps take the emotion out of your decision-making and provides some structure for when you open and close your positions
- Choose your forex trading platform: each of our forex trading platforms, including MT4, can be customised to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools
- Open your first position: choose whether you’re going to buy or sell, enter the size of your position and take steps to manage your risk
Remember that there are various factors that affect the price of a currency. So, you should always perform technical analysis and fundamental analysis on a currency pair before you decide to trade. Consider political and economic events, and study key price levels to form a basis for your forex positions.
When to buy and sell forex
Knowing when to buy and sell forex depends on many factors, such as market opening times and your FX trading strategy. Many traders agree that the best time to buy and sell currency is generally when the market is most active – when liquidity and volatility are high.
The UK forex market is busiest just after the open of the London session at 8am (UK time). Trading will usually become less liquid at around 10am (UK time), and it will pick up again after the American markets open at around 12pm (UK time).
Aside from market open and close times, you might also decide when best to buy and sell forex according to your individual trading strategy. Three popular FX trading strategies that can be effective ways of determining when to buy and sell currency in forex trading include:
Trend trading is a strategy that involves using technical indicators, such as moving averages or the relative strength index (RSI), to identify the direction of market momentum. In simple terms, it can help to establish whether the forex market is in an uptrend (bullish), a downtrend (bearish) or a sideways trend. While it can cover any timeframe, it is generally used as a mid to long-term trading strategy.
Trend reversal trading
In forex trading, a trend reversal is a turnaround in the price movement of a currency pair. This can be when a bullish trend turns bearish, or vice versa. You can use technical indicators such as the stochastic oscillator to establish if an FX pair is in overbought or oversold territory which might indicate that a reversal is imminent.
Range trading is based on the principal that a market moves consistently between two price levels for a definitive period of time, without making upward or downward progress. If you’re a range trader, you can go both long and short, depending on how the current market price is moving within the range. This is unlike trend trading, where you would go with the overall direction of the trend, and buy in a rising trend and sell in a falling one.
Remember, some traders prefer high volatility, while others do not. Regardless of your trading style and when you choose to trade forex, it’s important to follow your trading plan and have a risk management strategy in place.
Managing your risk when buying and selling forex
Forex risk management means applying a set of rules and measures to ensure any negative impact of a forex trade is manageable. If you have an effective risk management strategy, you will have greater control over your FX trade profits and losses.
Follow these steps to effectively manage your risk when trading forex:
- Learn everything you can about the forex market
- Get a grasp on derivative products and leverage
- Build a personalised trading plan
- Set a risk-reward ratio
- Use stops and limits to mitigate your risks
- Manage your emotions
- Keep an eye on news and current events
- Start with a demo account if you need more time
Buying and selling forex summed up
- Buying and selling in forex means speculating on the upward and downward price movements of a currency pair
- All forex trading involves buying one currency and selling another
- You would buy the pair if you expected the base currency to strengthen against the quote currency, and you would sell (short) if you expected it to do the opposite
- The price of a forex pair is how much one unit of the base currency is worth in the quote currency
- The best time to buy and sell currency is generally when the market is most active – when liquidity and volatility are high
- Three popular FX trading strategies that can be effective ways of determining when to buy and sell currency in forex trading include trend trading, trend reversal trading and range trading
- You should have an effective risk management strategy in place when trading forex so that you can have greater control over your profits and losses
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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.
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