DEFINITION

Forex trading

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 exchanged for many different reasons, chiefly for business, trade and tourism. An obvious example is when you exchange your own currency for another when you go on holiday.

Traders can buy and sell currency pairs like GBP/USD (British pound against the US dollar) and speculate on their price movements. The difference between the opening and closing prices determines whether the trade makes a profit or a loss.

Forex trading - Quick links:

• Our fixed spread currency pairs
• Main ways to trade forex
• Is forex right for me?
• How to trade forex
• 3 key influences on the forex market
• Forex trading example
• Forex trading costs
• The final word on forex trading from David, Senior Market Analyst
• How to start forex trading

How do I make a forex trade?

1. Choose a currency pair you want to trade

All forex transactions are traded in pairs, one currency against another e.g GBP/USD:

• The first is the ‘base’ currency
• 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. So think of your trade in terms of the first currency in the pair. For instance, if you expect the British pound to rise against the US dollar, you would ‘buy’ GBP/USD. If you expected it to fall, you would ‘sell’ GBP/USD.

Common currency pairs include:

• GBP/USD (pound sterling vs US dollar)
• EUR/USD (euro vs US dollar)
• USD/JPY (US dollar vs Japanese yen)
• AUD/USD (Australian dollar vs US dollar)

2. Decide whether you want to 'buy' or 'sell'

For example, if you requested a quote for the GBP/USD pair, (British pound vs US dollar), you would receive two prices. The lower one is the ‘sell’ price, and the higher is the ‘buy’ price. The difference between the two is called the ‘spread’ and determines how much it will cost you to make the trade.

3. Set your risk management

You can manage potential  losses by choosing a ‘stop’ order and also set a profit target with a ‘limit’. Combined, these will automatically prevent you from losing more than you bargained for, while helping you make a profit if the market moves in your favour.

4. Open your trade

Let’s say you think the price of GBP is going to rise relative to the USD. You open your trade by entering your position size and then clicking ‘buy’. If you think the British pound will fall against the US dollar, you can enter your position size and select ‘sell’. Get it right and you’ll profit. Get it wrong and you’ll take a loss.

5. Monitor your position

Even though you’ve set your ‘stop order’ and ‘limit’, you should continue to monitor your forex trade. It’s also important to stay up to date with any news that could impact the forex market.

6. Close your trade

Your trade might be closed automatically if either your ‘stop’ or limit’ orders are hit. Alternatively, you might decide to close your position manually and take your profit or loss.

FOREX TRADING IN ACTION

Example

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

SELL:1.34250
BUY:1.34258

As you can see, the spread is just 0.8 of a point.

There is a minimum price movement for every currency pair. When the GBP/USD pair goes from 1.34258 to 1.34268, that is a point.

You expect the price of GBP to rise, so you buy at 1.34258.

You decide to trade £0.50 per point.

• The value of your trade is calculated by multiplying your buying price by your trade size.

This trade has a value of £6,712.90 (13425.8 x 0.5)

• 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:

The margin requirement is 3.33% of the trade value. So, you need to hold a minimum of £223.54 in your account to complete this trade (£6,712.90 x 3.33/100).

Forex trading costs

The cost of your forex trade is determined by the spread (the difference between the buy and sell prices). The smaller the spread, the cheaper the trade. This sounds simple enough, but you also need to consider whether your spreads are fixed or variable.

• Variable spreads:

These can change at any time, and can widen significantly if the underlying market gets volatile. Large price swings are quite common in forex. And when this occurs it’s likely your spread will widen and your trading costs will suddenly go up. Imagine this happens when you want to close a forex trade. This could end up costing you far more than you originally planned.

• Fixed spreads:

These stay exactly the same, no matter what’s happening in the underlying forex market. With fixed spreads, traders have complete transparency over their costs. Trade Nation’s fixed spreads tend to be lower than our competitors. But most importantly they don’t widen just because market volatility picks up.

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

You can be certain that your spread will stay the same even if those in the underlying forex market don't. In addition, 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!