Forex is short for foreign exchange. You may have come across foreign exchange when you’ve been away on holiday — certainly before it was standard practice to use your debit card abroad. You’ll have rocked up at your local Post Office with a wad of cash and asked to convert it into the currency of your destination. On your return, you head back and convert what’s left (if any) back into pounds. You may have noticed that on your return from your holidays that the exchange rate has changed, particularly if you were abroad during the Brexit vote in 2016 or the Lehman Brothers bankruptcy in 2008. In these two instances, you may have got back more in pounds than you originally spent for the same amount of currency.
Essentially, this is the premise of forex trading — except investors are changing money as a means to make money rather than to jet off abroad, making the most out of ever changing foreign exchange rates. Investors attempt to buy currency and change it back when the currency they’re holding is stronger against the original currency.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Forex trading pairs two currencies together, with the trader predicting which will be worth more after a given period. The two currencies are referred to as the base currency and the counter currency.
After you’ve set up an account you’ll be able to browse for currency pairs. You can usually choose to buy currency pairs based on quantity or value. If an investor thinks that a currency is going to strengthen against another, they may decide to trade a currency pair, going long on (buying) the one that they think will strengthen.
Exchange rates change all the time, so for example, sometimes you could get USD for a little cheaper, while other times it may be more expensive. This happens as these currencies strengthen and weaken against one another.
Say the GBP/USD exchange rate was 1, which means that £1 is equal to $1. You might choose to buy $500 for £500. If the dollar strengthened against the pound and £1.50 was suddenly equal to $1, you could buy £750 with your $500, getting you £250 in profit.
Currency doesn’t usually move quite as drastically as this, so don’t expect this example to be anything like your forex experience.
An exchange rate is the amount of one currency you’d need to purchase 1 of another currency, but they can get a little muddled and confusing at first.
It’s important to note the position of each currency when looking at a currency pair, for example with USD/GBP, the exchange rate represents the amount in GBP that you’ll need to buy $1. If the currencies were reversed and showed as GBP/USD, it represents the amount in USD you’ll need to buy £1. The first currency is always the one being bought, while the second is always the one being sold.
Leverage. When you enter a trade with only a small percentage of the full trade amount.
Margin. The minimum percentage of the trade that you need to put down to open the trade.
Spread. The difference between the buy and sell price. Wider spreads will cost you more money, so when looking for a provider, you’re looking for tighter spreads.
Forex trading isn’t for beginner investors — it’s a lot more complex compared with traditional stock market investing. We have a detailed step-by-step guide on investing for beginners if you’re looking for the basics.
Realistically, it’s not worth getting into forex unless you’ve got your head around investing in the stock market and know a little about contracts for difference, short selling, futures and leverage.
Foreign exchange rates change all the time based on a huge range of external factors that impact supply and demand. You hear about the pound strengthening against the dollar or the euro weakening against the pound – this usually has something influencing it, such as:
There are two different types of forex trade, these are:
A spot trade is one done on the spot. It’s almost certainly the one that you get when you buy foreign currency to go on holiday and is the most popular choice for investors in the forex market. For spot trades, you get the current exchange rate.
These are technically different things, but, on the face of it, they’re both agreements to buy on a future date at a predetermined price. Neither forwards or futures contracts trade actual currencies, merely contracts that represent claims to the currency. They show the currency type, the price and the settlement date.
In the case of forwards contracts, they are bought and sold between two parties who decide the terms between them.
Meanwhile, futures contracts are bought and sold with a standard size and settlement date.
Forex platforms don’t tend to charge commissions, but it’s not unheard of. They usually make money through spreads, which is a set difference between the buying and selling price that moves in line with the changing prices. There may be additional fees, such as:
If you want to start trading forex, you’ll need a trading platform that offers it. We’ve listed some below for you to compare. If you already invest in equities then your existing provider may already offer forex, but this will depend on how established it is — you can always have a separate account for each purpose.
Once you’ve opened an account and you’re verified, you just need to get familiar with the platform and how it’s laid out. Some providers, such as Trading 212 and eToro, have demo accounts that let you give it a go before you start, so this could be worthwhile.
While it might seem straightforward, forex trading isn’t easy money — you need to have a good understanding of the foreign exchange market and the factors that impact exchange prices. Start small, with a solid plan in place for the trades you make. You can always ramp it up down the line, once you feel that you can make predictions on currency movements with a certain level of confidence.
One factor which you may not have considered is that it’s difficult to get advice on currency trading — you need to teach yourself what you need to know, for the most part.
When comparing forex trading platforms, keep in mind the following:
Finder’s investment expert Zoe Stabler answers
While it’s certainly possible, this isn’t easy money or a chance to get rich quick. Real knowledge and experience is required in order to get success out of it. If you’re serious about starting to trade forex, don’t focus on getting rich — celebrate small wins and gradually work your way up.
In general, yes, but to trade forex pairs you need to have in-depth knowledge of worldwide economics and be able to keep track of what will impact the price of currencies. Because it’s global and primarily over-the-counter, you can trade on the forex market 24 hours a day, which is appealing to investors.
Foreign currency is pretty liquid, meaning it isn’t typically difficult to buy and sell, so trades are often executed instantly.
Forex currency pairs and why you should (or shouldn’t) trade them.