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 spread betting, CFDs or a forex broker, 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 three main ways to get involved: forex spread betting, forex CFDs or trading forex via a broker.
What is forex spread betting?
Forex spread betting 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 – and the further it moves in the opposite direction, the more you lose. The amount that you make or lose per point of movement is determined by the size of your bet.
Forex is just one of the markets you can trade using spread betting. Plus, all your profits from spread bets are completely free from tax.*
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.
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 as well as 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 have access to other markets – and you’ll have to pay tax on any profits you make.*
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, and 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 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.
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 examples
Spread betting on GBP/USD
GBP/USD is trading at 1.32586, with a 1-point spread. Spread betting markets are always listed in points, so you’ll see a market price of 13258.6, with a buy price of 13259.1 and a sell price of 13258.1.
When forex spread betting, you select a certain number of pounds per point of movement to determine your position’s size. You think that GBP/USD is headed downwards, so you sell the market at 13258.1 and bet £5 per point.
13258.1 x £5 per point = £66,290.5, which is your total position size. But since spread betting is a leveraged product, you only have to pay the margin factor for your chosen market. In this FX example, the margin for GBP/USD is 3.33%, meaning you have to put down £2207.47.
If your prediction is correct
GBP/USD falls to 13198.6, with a buy price of 13199.1 and a sell price of 13198.1. You close a spread bet by dealing in the opposite direction to when you opened the position, so you buy £5 per point at 13199.1.
You’ve earned £5 for every downward point of movement, and 1.3258.1 – 13199.1 = 59, so the market has moved 59 points in your favour. 59 x 5 = 295, meaning you’ve earned £295 profit.
There’s no commission or tax to pay with spread betting*, but you’d have had to pay a funding charge if you kept your position open overnight.
If your prediction is wrong
GBP/USD rises to 13318.6, with a buy price of 13319.1 and a sell price of 13318.1. You buy £5 per point at 13319.1 to close the trade.
Because this is a short selling currency example, you’ve lost £5 for every upward point of movement. 13319.1 – 13258.1 = 61, and 61 x £5 per point = £305 – so you’ve lost £305 on the trade.
Once again, you’d also have had to pay a funding charge if you kept your position open overnight.
Trading a GBP/EUR CFD
GBP/EUR is trading at 1.1284, with a buy price of 1.1285 and a sell price of 1.1283, giving it a spread of 2 points. You think that the pound is set to gain value against the euro, so you decide to buy the market at 1.1285.
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 GBP/EUR CFD is the equivalent of trading £100,000 for €112,850. You decide to buy three CFDs, giving you a total position size of €338,550 (£300,000). This means you’ll earn €30 for every point of movement.
CFDs are a leveraged product, so you don’t have pay the full value of your position upfront. GBP/EUR has a margin factor of 3.33%, so you’ll need to commit €11,273.71 as margin.
If your prediction is correct
The pound rises against the euro, and GBP/EUR is now trading at 1.1309, with a buy price of 1.1310 and a sell price of 1.1308. You reverse your trade to close your position, so you sell three contracts at 1.1308.
Your £300,000 is now worth €339,240, because 1.1308 x (100,000 lot size x 3 CFDs) = €339,240. €339,240 – €338,550 = €690, which is your profit from the trade. You could also calculate this as 11308 – 11285 = 23, which you multiply by €30 per point to get €690.
As ever, you’d have had to pay funding charges if you kept your position open overnight – and you’ll also have to pay capital gains tax on any profits.
If your prediction is wrong
The pound falls against the euro, and GBP/EUR is trading at 1.1259, with a sell price of 1.1258.
1.1258 x (100,000 lot size x 3 CFDs) = 337,740, which means your three contracts are now worth €337,740, €810 less than when you opened your position. Another way to calculate this is to subtract 11258 from 11285, which gives you a loss of 27 points. 27 x 30 euros per point = €810.
As this is a losing trade, you don’t have to pay capital gains tax and you can offset a CFD loss against future profits for CGT purposes. * You will have paid funding charges if you held the position overnight, however.
What are the differences between forex CFDs and forex spread betting?
The main difference between forex CFDs and spread bets are how you trade them: you trade forex CFDs in contracts or lots and spread bets by points.
We therefore display CFD forex prices in the same way you would expect to see them on an FX exchange – eg 1.3142 – and spread bets on forex are displayed as currency per point – eg. 13142.5. 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.
There are a range of differences between these two financial derivatives – including DMA, commission and tax.
Develop your forex knowledge with IG
Find out more about forex trading and test yourself with IG Academy’s range of online courses.
* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.