Written byAnzel Killian, Senior financial writer. Rated byAxel Rudolf, senior market analyst
What is Forex Trading?
Forex trading, also called currency trading or currency trading, is the conversion of one currency into another. FX is one of the most actively traded markets in the world, with individuals, companies and banks executing currency trades worth approximately $6.6 trillion every day.
While much foreign exchange is done for practical purposes, the vast majority of currency conversion is done by forex traders to make a profit. The amount of currency converted each day can make the price movements of some currencies extremely volatile – something you should be aware of before trading currencies.
We are one of the largest retail forex providers in the world7– with a variety of major, minor and exotic currency pairs that allow you to go long or short.
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Beginner's Guide to Forex: Learn to trade Forex in 6 steps
- Forex trading essentials for beginners
- How does forex trading work?
- Why do people trade forex?
- Discover how currency markets work
- How to Become a Forex Trader
- Free courses and webinars on currency trading
Forex trading essentials for beginners
- What is a forex pair?
- What are the base and quote currencies?
- What is a pip in forex?
- What is a lot in forex trading?
What is a forex pair?
A forex pair is a combination of two currencies traded against each other. There are hundreds of different combinations to choose from, but some of the most popular are the Euro against the US Dollar (EUR/USD), the US Dollar against the Japanese Yen (USD/JPY) and the British Pound against the US Dollar ( GBP/USD).
What are the base and quote currencies?
The base currency is always on the left side of a currency pair and the quote is always on the right side. The base currency always equals one, and the bid currency equals the current bid price of the pair - indicating how much of the bid currency it would cost to buy one of the base currencies. So when you trade currencies, you are always selling one to buy another.
What is a pip in forex?
INdo I pip forexis usually a movement of eight decimal places on a currency pair. So if GBP/USD moves from $1.35361 to $1.35371, the price has moved one pip. But if you are trading JPY crosses, a pip is a change to the second decimal place. A fifth decimal price movement in forex trading is known as a dropper.
What is a lot in forex trading?
Currencies are traded in lots, which are batches of currencies used to standardize currency transactions. Because exchange rate fluctuations are usually small, the numbers are often very large. For example, a standard lot is 100,000 units of the base currency.
How does forex trading work?
Forex trading works just like any other transaction where you buy an asset using a currency. In the case of forex, the market price tells a trader how much of one currency is needed to purchase another. For example, the current market price of the GBP/USD currency pair shows how many US dollars are needed to buy one pound.
Each currency has its own code, allowing traders to quickly identify it as part of a pair. We've included codes for some of the most popular currencies below.
What does it mean to buy or sell a currency pair?
Buying a currency pair means that you expect the price to rise, indicating that the base currency is strengthening against the quote currency. Selling a currency pair means you expect the price to fall, which would happen if the base currency were to weaken against the exchange rate.
For example, you would 'buy' the GBP/USD pair if you think the pound will strengthen against the dollar - meaning you would have to spend more dollars to buy one pound. Or you 'sell' this pair if you think the pound will weaken against the dollar - meaning you need fewer dollars to buy one pound.
What is the spread in forex trading?
See AlsoHow Much Should You Get Started With Forex Trading?How Much Do Successful Forex Traders Earn in 2024?Top 10 most traded currency pairsHow much do I need to start trading Forex | FBSThe spread in currency trading is the difference between the buying and selling prices. For example, the buy price could be 1.3428 and the sell price could be 1.3424. For your position to be profitable, the market price must rise above the buy price or fall below the sell price, depending on whether you went long or short.
What is Margin and Leverage in Forex Trading?
Margin refers to the initial deposit you need to make to open and maintain a leveraged position. So a EUR/USD trade may only need a 0.50% margin to open. As a result, instead of having €100,000 to open a position, you only need to deposit €500.
Why do people trade forex?
- Deciding whether currencies strengthen or weaken
- Hedging met forex
- Grab your chance 24 hours a day
Deciding whether currencies strengthen or weaken
Traders make a predictionforexpair to benefit from the strengthening or weakening of one currency against another. When the price of a pair rises, it means the basis is strengthening relative to the price, and if it falls, the basis weakens relative to the price.
This is because a rising price means it takes more of the supply to buy one unit of the base, and a falling price means it takes less of the supply to buy one of the base units. So, traders would likely go long if the basis strengthens against the quote currency, or go short if the basis weakens.
Some of the most popular forex trading styles arescalpeerders,Day trading,swing tradingInposition trading. You can choose a different style depending on whether you have a short-term or long-term perspective.
Hedging met forex
Coveris a way to reduce your risk exposure. This is achieved by opening positions that will benefit if some of your other positions fall in value - with the gains hopefully offsetting at least some of the losses.Currency correlations are effective ways to hedge currency exposure. An example of this is EUR/USD and GBP/USD, which are positively correlated because they tend to move in the same direction. So you can go short GBP/USD if you have a long EUR/USD position to hedge against possible market declines.
Grab your chance 24 hours a day
The Forex market is open 24 hours a day thanks to the global network of banks and market makers who constantly exchange currencies. The main sessions are the US, Europe and Asia, and it is the time differences between these locations that ensure the forex market is open 24 hours a day.
The forex trading market opening hours are incredibly attractive and give you the opportunity to take advantage of the opportunities 24 hours a day. We are also the only provider that offersweekend tradingopcertain currency pairs, includingweekend GBP/USD, EUR/USD and USD/JPY. This means you can trade these combos while others cannot.
Discover how currency markets work
What moves the currency market?
- Central banks
- News reports
- Market sentiment
The Forex market consists of currencies from all over the world, which can make predicting exchange rates difficult as there are many forces that can contribute to price movements. That said, the following factors can all have an effect on the forex market.
Central banks
The supply of a currency is controlled by central banks, which can announce measures that will have a significant effect on the price of that currency. Quantitative easing includes e.g. injecting more money into an economy and can cause the price of a currency to fall in line with increased supply.
News reports
Commercial banks and other investors tend to want to put their capital in economies with strong prospects. So if positive news about a particular region reaches the markets, it will encourage investment and increase demand for the region's currency. If negative news comes, demand can be expected to drop. This is why currencies tend to reflect the reported economic health of the region they represent.
Market sentiment
Market sentiment, which often reacts to the news, can also play a big role in driving currency prices. If traders believe a coin is moving in a certain direction, they will trade accordingly and can convince others to follow suit, increasing or decreasing demand.
How to Become a Forex Trader
Learn ways to trade forex
There are moreways to trade forex, includedhandelsplek forex, forex futures a currencypossibilities. When you trade with us, you predict the price of spot forex, futures and options to rise or fall by oneCFDaccount.
- Discover forex tradingIt allows you to trade forex pairs at their current market price with no fixed expiration date
- Forex or currency futures allow you to trade forex pairs at a specific price that settles on a specific date in the future or within a range of future dates
- Forex or currency optionslets you trade contracts that give the holder the right, but not the obligation, to buy or sell a currency pair at a fixed price if it rises above that price within a certain time frame
All of these – spot, futures and options – can be traded with andFX CFD's. These are financial derivatives that allow you to predict whether prices will rise or fall without owning the underlying asset.
What is a forex broker?
A forex broker provides access to trading platforms that can be used to buy and sell currencies. For example, when you trade forex with us, you can use ouraward-winning platform8ofMT4– both of which have their own unique advantages.
Forex brokers charge a fee, usually in the form of a spread. This is the difference between the buy (ask) and sell (bid) prices, which are wrapped around the underlying market price. The costs of a transaction are included in these two prices, so you always buy slightly higher than the market price and sell slightly below.
Traditionally, a forex broker would buy and sell currencies on behalf of their clients or retail traders. But with the rise of online trading, you can buy and sell currencies yourself using financial derivatives such asCFD's, as long as you have access to a trading platform. This is because all currency trading takes place over-the-counter (OTC), rather than on shares on the exchange.
Discover the risks and rewards of forex trading
- Forex is the most traded financial market in the world, meaning exchange rates are constantly changing, creating more trading opportunities
- Some forex pairs are more volatile than others. Those with low liquidity tend to be more volatile, including many 'small' pairs
- Pairs that include the USD tend to be more liquid because, as the world's reserve currency, the USD is often in high demand
- Slippage is sometimes an issue in forex trading, given how volatile the market can be. To help mitigate the effects of slippage on your forex trades, you should add stops and limits
- However, if you are aware of the risks and take appropriate steps to reduce your exposure, the foreign exchange market could be the source of your next opportunity.
Free courses and webinars on currency trading
To be successful in forex trading, you can take advantage of educational resources and platforms that will help you build your confidence. We offer both:IG Academyand oursdemo konto.
IG Academy has a wealth of information to familiarize yourself with the markets and learn the necessary skills to increase your chances of successful forex trading. Alternatively, you can use an IG demo account to build your trading confidence in a risk-free environment, complete with $20,000 in virtual funds to plan, place and monitor your trades.
We also offer trading strategies andnews articlesfor all experience levels. This includes 'beginners', such as how to become a successful day trader, to 'expert' - looking at technical indicators you may not have heard of before.
Once you've built your confidence and feel like you're ready to trade the live forex markets, you can create a live account with us in five minutes or less. You get access to award-winning platforms,824 hour expert support and spreads from just 0.6 points.
Frequently Asked Questions
What does forex (FX) trading mean?
Forex trading means exchanging one currency for another. Forex is always traded in pairs, meaning you sell one to buy the other.
Is there a difference between currency trading and currency trading?
There is no difference between currency trading and forex trading as both involve exchanging one currency for another. When you trade forex or currency, you try to make money by predicting whether the price of a currency pair will rise or fall.
How can I make money with Forex trading?
You can make money in forex trading by correctly predicting the price movements of a currency pair and opening a position that will yield profits. For example, if you think a pair will decrease in value, it willcould go short and profit from a falling market.
If you think a pair will rise in value, you can also go long and take advantage of a rising market.
How can I start trading FX?
You can start trading currencies with a currency trading account. In addition, you should also be aware of what moves the foreign exchange market – such as central bank announcements, news reports and market sentiment – and take steps to manage your risk accordingly.
What costs and fees do you have to pay for currency trading?
The costs and fees you pay when trading currencies vary from broker to broker. But keep in mind that you will often be trading currencies with leverage, which will reduce the initial amount you need to open a position. However, keep in mind that leverage can increase both your profits and your losses.
How much money is traded in the foreign exchange market every day?
Approximately $6.6 trillion worth of currency transactions take place every day, which equates to an average of $250 billion per hour. The market is largely made up of institutions, companies, governments and currency speculators – speculation makes up around 90% of trading volume and a large majority of this is concentrated in the US dollar, euro and yen.
Are currency trading income taxable?
The tax on currency positions depends on which financial product you use to trade the markets.
When you trade through a forex broker or through CFDs, any profits on your forex positions are taxable. However, your losses are deductible and, depending on your circ*mstances, can also be used to offset profits made elsewhere.9
How is the foreign exchange market regulated?
Despite the sheer size of the forex market, there is very little regulation as there is no governing body to monitor it 24/7. Instead, there are several national trading organizations around the world that oversee domestic currency trading, as well as other markets, to ensure that all forex providers adhere to certain standards. For example, in Great Britain the supervisory body is the Financial Conduct Authority (FCA).
What are Gaps in Forex Trading?
Gaps are points in a market where there is a sharp move up or down with little or no trading in between, resulting in a 'gap' in the normal price pattern. There are holes in the forex market, but they are not thereare significantly less common than in other markets because they trade 24 hours a day, five days a week.
However, gaps can arise when economic data is released that comes as a surprise to the markets, or when trading resumes after a weekend or holiday. Although the foreign exchange market is closed for speculative trading this weekend, the market remains open to central banks and related organizations. It is therefore possible that the opening price on Sunday evening is different from the closing price on the Friday evening before, causing a gap.
Develop your forex knowledge with IG
Learn more about forex trading and test yourself with IG Academy's selection of online courses.
Develop your forex knowledge with IG
Learn more about forex trading and test yourself with IG Academy's selection of online courses.
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