How to trade forex

Once you learn how to trade forex, you’ll understand why it’s such a popular market. You’ll discover that you can choose between many different currency pairs – from majors to exotics – and trade 24 hours a day. Use this guide to learn how to trade currency with our FX trading steps and examples.

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Choose a currency pair to trade

With IG, you can choose to trade more than 80 currency pairs – from majors, such as GBP/USD to exotics such as HUF/EUR. You can trade these forex pairs via CFDs or spread bets.

When choosing an FX pair to trade, you should base your decision on fundamental analysis and technical analysis of the two currencies. This means you should assess how the ‘base’ (the first listed currency) and the ‘quote’ (the second listed currency) move in relation to each other.

Decide whether to ‘buy’ or ‘sell’ your chosen currency pair

Once you’ve chosen a currency pair to trade, you need to decide whether you want to ‘buy’ or ‘sell’ based on a thorough fundamental and technical analysis of the market.

You would buy the pair if you expected the base currency to rise in value against the quote currency. And you would sell if you expected it to do the opposite. That’s because the pair’s price represents how much one unit of the base currency is worth in the quote currency. As an example, if the price of GBP/USD is 1.28000, that means that £1 costs $1.28

Set your stops and limits

Forex markets are particularly volatile, which is why it’s so important to have a plan to guide the entry and exit points of your trade. There are various stops and limits you can set to manage your risk when trading forex:

Normal stops will close your position automatically if the market moves against you. Note that normal stops do not protect against slippage.

Guaranteed stops will always be closed out at exactly the price you specified.

Place a trailing stop when you open your trade to follow positive price movements and close your position if the market moves against you.

Set a limit order in line with your profit target, and we’ll close your position for you when the price hits your chosen level.

Open your first trade

If you want to trade forex via CFDs or spread bets, you can open an IG account in minutes. Simply open the platform, search the forex pair you want to trade in the search bar, enter your position size and choose ‘buy’ or ‘sell’.

There’s no obligation to add funds until you want to place a trade.

Monitor your forex trade

Once you’ve opened your position, you can monitor the profit or loss of your forex trade in the ‘open positions’ section of the dealing platform. You can set price alerts to receive email, SMS or push notifications when a specified buy or sell percentage or point is reached.

You should continue to do technical analysis using trading signals and indicators to determine what your chosen forex pair might do next. Further, you should always keep up to date with any fundamentals that could move your chosen pair’s price. For example, if you want to trade cable, consider Brexit and the US-China trade war, as well as Bank of England and Federal Reserve Bank announcements.

Close your trade and take your profit or loss

Once you’ve decided it’s time to close your position, simply navigate to the ‘positions’ tab, select your position and click on ‘close’. Alternatively, just make the opposite trade to when you opened it. In other words, if you went long on GBP/USD, go short by an equivalent amount to close the position.

Forex trading examples

Select a tab below to find out more about the different ways to trade forex, along with examples of how they work.

  • Spread betting
  • Trading CFDs

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.

Spread bet prices are displayed in points – for example, if GBP/USD is trading at $1.31425, its price would be displayed as 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. The amount that you make or lose depends on how much you bet per point of movement.

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.*

See an example of buying a currency pair

See an example of selling a currency pair

Trading CFDs

When you trade a CFD, you are agreeing to exchange the difference in the price of an asset from the point at which the contract is opened to when it is closed. CFD prices are displayed in the same way you would expect to see them on a forex exchange – for example 1.31425.

  • Open a long position, and you’ll make a profit if the currency pair increases in price, and a loss if it falls.
  • Open a short position, and the opposite is true.

Standard forex contracts are worth 100,000 units of the first named currency in the pair, while mini forex contracts are worth just 10,000 units of the same.

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.

Example of buying a forex CFD

Example of selling a forex CFD

FAQs

With CFD trading, you’re agreeing to exchange the difference in the forex pair’s price from the point at which the contract is opened to when it’s closed. With spread betting, you bet an amount per point of movement in the underlying market.

There are also a range of differences between the benefits of these two financial derivatives – including DMA, commission and tax.

You only need to put down a small deposit (usually 3.33% for forex) as when you trade forex with derivatives, you trade on leverage. However, while that’s all you need to start trading, remember that profits and losses will be magnified, so you should always be able to cover the downside if you lose.

You can protect yourself with stops and limits. Retail clients also benefit from negative balance protection, so can't lose more than they’ve deposited in their account.

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 what 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.

Anyone can trade forex if they develop their trading knowledge, build a forex trading strategy and gain experience trading the market. However, the volatility of the forex market is a unique environment that takes time to understand.

If you’d like to practise trading forex, you can open a risk-free demo account.

A forex trading strategy should consider 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.

The forex market is extremely volatile, so a currency pair that moves up one week, might go down the next. However, the majority of forex trading volume is found on a handful of forex pairs, including EUR/USD, USD/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.

Develop your forex knowledge with IG

Find out more about forex trading and test yourself with IG Academy’s range of online courses.

You might be interested in…

Learn more about spread betting with IG

Be aware of the risks associated with forex trading and understand how IG supports you in managing them

Discover the different platforms that you can trade forex with IG

* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% 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.