How to trade forex

Learn to trade FX and speculate on the forex market. Discover whether to use forex CFDs or spread betting, how the forex market works, and how to open your first position.

Are you ready to start forex trading?

When you learn to trade FX, it's not hard to see why it is such a popular market among traders. There’s a huge number of different currency pairs to trade – from majors to emerging currencies to exotics – 24 hours a day. And many of those pairs are among the most liquid markets available, keeping spreads tight and prices volatile.

Follow these three steps to start trading forex:

  1. Decide how you’d like to trade forex
  2. Learn how the forex market works
  3. Open your first position 

Three ways to trade forex

The vast majority of forex trading takes place between major banks and financial institutions, who 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 three main ways to get involved: forex spread betting, forex CFDs or trading forex via a broker.

Here’s a quick introduction to how all three work.

What is forex spread betting?

Forex spread betting is a way to trade on currency price movements that involves making a bet on the direction in which a forex pair’s price is headed. The further it moves in that direction, the greater your profit. The further it moves in the opposite direction, the more you lose. The actual amount that you make or lose is determined by the size of your bet. 

Forex is just one of the markets you can trade using spread betting, alongside indices, shares, commodities, cryptocurrencies and more. Plus all your profits from spread bets are completely free from tax.1

Leverage example

* Doesn't refer to forex broking

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 forex position 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.

CFDs are liable for capital gains tax, but you can offset your losses against profits for tax purposes. And like spread betting, you can trade forex alongside thousands of other markets.

Forex trading via a broker

Forex trading via a broker – or sometimes via a bank – works in a broadly similar way to CFD trading and spread betting.

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 be have access to other markets – and you’ll have to pay tax on any profits you make.1

Similarities between spread betting, CFDs and forex trading

While there are some key differences between forex CFDs, forex trading and forex spread betting, there are also lots of similarities. Whichever option you choose, you’ll probably pay to open your position via the spread, instead of commission. And you’ll always speculate on the price movements of forex pairs instead of on currencies in isolation.

All retail forex trades will take advantage of leverage. Leverage allows retail forex traders to get exposure to large amounts of currency without having to pay the full value of their trade upfront. Instead, you only put down a deposit known as margin.

Your profit or loss will still be calculated based on the full size of your position, though. So your profits and losses can be far greater than the amount you put down to open the trade, and your losses can sometimes even exceed your initial deposit.

Find out more about how a forex trade works.

Why do CFD and spread betting forex prices look different?

You trade forex via CFD in contracts or lots. We therefore display CFD forex prices in the same way you would expect to see them on an FX exchange: eg. 1.31425

Because you spread bet on forex in currency per point, we display prices differently eg. 13142.5. This makes it easier to see per point movements.

This makes no difference to the price you deal at or your potential profit or loss: it simply makes it easier to track per point movements.

Understanding the forex market

One of the first things to learn when you want to trade currencies is how the forex market operates, which is wholly 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, and a quote price to sell a forex pair. 

Forex trading happens all around the world, and while the biggest trading centres are New York and London, Tokyo, Singapore and Hong Kong are important hubs too. This is why currency pairs are available to trade 24 hours a day. When the Asian session ends, the European one begins; when the European one ends, trading starts up in North America.

Trading via forex providers

Most retail traders, though, 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 you can buy and sell forex without the spread – instead trading at the prices offered by currency providers, plus a variable commission. To trade with Forex DMA, you’ll need to qualify for an IG professional account.

Learn more about trading forex

Discover the advantages of spread betting and CFD trading – and see how you can get started – with IG Academy’s online course.

Steps to trading forex

1. Open an account

If you want to trade forex via spread betting or CFDs, you’ll need an account with a leveraged trading provider. You can open an IG account in minutes, and there’s no obligation to add funds until you want to place a trade. 

2. Develop a trading plan

This 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. 

Find out more about how to build a trading plan.

3. Do your research

If you’ve chosen to use a particular forex trading strategy, then now’s the 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’re a purely technical trader, though, 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 take into account. 

Learn more about what moves forex markets.

4. Place a trade

You can trade via the IG Trading platform in your web browser, one of our mobile apps, or even using advanced third-party platforms like MT4.

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.

When you’ve decided it’s time to close your position, just make the opposite trade to when you opened it. 

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1 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. 79% 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. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.