What is forex trading

& how does it work?

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DEFINITION

Forex trading (AKA foreign exchange or FX)

Forex is the world’s largest financial market, open 24 hours a day, 5 days a week. Forex trading is the process of buying and selling global currency pairs. Currencies are converted for a number of reasons, mostly for business, trade and tourism — like when you exchange your home currency before you go on holiday.

Traders can buy and sell currency pairs like GBP/USD (pound sterling vs US dollar) and speculate on their price movements. The difference between the buy and sell prices at the start and end of the trade determines whether they make a profit or a loss.

What are the main ways to trade forex?

The two most popular ways to trade forex are spread trading and CFD trading. Spread trading is the more straightforward of the two because it’s up to you which currency you make the trade in, unlike CFDs where you may be stuck with an unfamiliar currency and struggle to understand the costs and risks. You’ll also have to pay to convert profits into your preferred currency with CFD trading.

Spread trading also lets you choose how much you want to trade per point, whereas CFD providers decide this for you. Ultimately, spread trading gives you total control over what you’re trading, making this perfect for forex beginners. Here at Trade Nation, we offer 30 currency pairs on our regulated spread trading platform.

Hang on! I’m a new trader, is this right for me?

Forex trading is often popular with beginners, but remember that it involves a level of risk.

The fact that the market is so closely tied to world events makes this an especially exciting and fast-paced activity to get involved in, and you don’t need much money to do so seeing as it’s a leveraged product – this means the broker (Trade Nation) provides you with borrowed capital to increase the potential return of an investment. However, do remember that your profits and losses will be on a much greater scale compared to your margin, so make sure you factor this into your risk profile and only put up money you can afford to lose.

When you trade forex via spread trading (as opposed to CFDs), you can do so in the currency of your choice and choose exactly how much to stake per point, giving you total control over the amount you’re trading.

TRADING FOREX

How do I make a forex trade?

If you wanted to trade GBP/USD (British pound sterling vs US dollar), for example, you would receive a buy price (the higher figure) and a sell price. The difference between the two prices is called the ‘spread’ and determines how much it will cost you to make the trade.

If you think the price of GBP is going to rise against the value of USD, you buy. Or you sell if you predict it will fall. Get it right and you’ll profit, get it wrong and you’ll suffer losses.

Other common currency pairs include:

  • EUR/USD (euro vs US dollar),
  • USD/JPY (US dollar vs Japanese yen)
  • AUD/USD (Australian dollar vs US dollar)

All forex trades are done in a currency pair e.g GBP/USD :

  1. The first is the ‘base’ currency
  2. The second is the ‘quote’ currency

The price of the pair depends on how much one unit of the base is worth compared to the quote.

3 things that can impact the forex market

Central banks

Central banks can take action that have profound effects on currency prices. For example, they may inject more money to an economy which will cause the price of the currency to decrease.

EXAMPLE

Forex trading in action

Let’s stick to GBP/USD for this example.

BUY: 1.09256

SELL: 1.0925

You expect the price of GBP to rise, so you buy at 1.09256.

Price movements are measured in ‘points’ and in this case you decide to trade £0.50 per point.

109256 x £0.50 = £54,628

However, as forex is what we call a leveraged product, you don’t need to have this much in your trading account. Instead, you can put up a small deposit also known as a margin.

In this example if the margin is 3.33%, that means you need just £1,819.11 in your account (£54,628 x 3.33/100).

To calculate the total value of your forex trade – multiply the price you have traded at by the number of £ per pip bought:

KNOW THE COSTS

How will I be charged for forex trading?

As we’ve already mentioned, the cost of your forex trade is determined by the spread (the difference between the buy and sell prices). The smaller the spread, the more cost-effective the trade. This sounds simple enough, but you also need to consider whether your spreads are fixed or variable.

  • Variable spreads:

Can change at any time, which is pretty concerning given how volatile forex can be — huge price swings are all too common. If this happens, it’s likely your spread will widen which means your trading costs have suddenly gone up. Imagine if it’s the widest when you want to close a forex trade, therefore costing you far more than you originally planned.

  • Fixed spreads:

Stay exactly the same no matter what happens in the forex market. This offers traders total transparency when it comes to their trading costs, which will be lower and protected against any market volatility.

In order to give you the fairest trading experience, Trade Nation only offers low fixed spreads.

You can be certain that your spread will stay the same even if the forex market doesn’t. As well as that, we offer an exclusive loyalty bonus where you’ll get back 25% of the spread you pay every month*. Withdraw or trade it — there are no terms, conditions or questions to worry about!

At Trade Nation, as well as offering low fixed spreads and a loyalty bonus*, we also have a variety of risk management tools to help you trade responsibly.

We give you the opportunity to explore forex trading on our easy-to-use platform. Simply set up a free practice account and get to grips with making trades without putting up your own money. This also gives you access to lots of useful resources that will teach you more about the ins and outs of forex trading.

HOW TO START PRACTICING FOREX TRADING WITH TRADE NATION

1. Create a trading account with Trade Nation

You can open a full account to start trading immediately or explore the ins and outs of our platform with a free practice account.

2. Explore our forex markets

Log into your account and open the trading platform. Here you can see all 30 currency pairs we offer under the ‘FX’ section of the Market Explorer.

3. Make the trade

Choose the currency pair you want and make your trade.

Set up a practice account, it’s free!

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.