What Is Forex? The Basics Explained
So, right off the bat, what is forex about? Well, where traditional stock market traders will buy and sell company shares on an individual or group basis, forex traders instead focus on trading within the currency market. The idea is basically to exchange one currency for another with the intention of benefitting from changes in currency value.
For a newcomer to trading, forex is an attractive choice due to the minimal capital required to get started, the ease of monitoring the market and the ongoing demand for various currencies. Let’s take a look at how forex trading works and see how you can develop Forex strategies that work.
How does forex trading work?
If you’ve ever wondered “what is forex trading?”, you’re definitely not alone. At some point or another, we’ve all participated in forex trading or “FX trading” of some kind when we’ve swapped our British pounds (GBP) for another currency when going on holiday (or converted our money back to GBP on our return). But how does forex trading work professionally?
Put simply, forex traders will simultaneously buy one currency while selling another, with the view to making a profit through speculation. This basically just means keeping a close eye on what the market is doing and trying to make accurate predictions on where it’s heading.
Banks and major financial institutions are constantly trading forex every single day, which creates a lot of market volatility – presenting investors with ample opportunities to make a quick buck by identifying or predicting price fluctuations, then taking out an appropriate position.
What positions can I take when trading?
Traders can take out either a “long” position or a “short” position when exchanging forex. These two positions function as follows:
Taking out a long position on a currency pair means that your trade will make a profit when the price rises.
Conversely, taking out a short position will help your forex trade to generate a profit when the price falls.
Buying and selling forex takes place over a network of banks – but most newcomers gain access to the market using a broker. Your position will need to be taken out on a currency pair, e.g GBP/USD, or USD/EUR, as the forex market focuses on value differences between individual currencies.
But there’s a little more to it than that. As a newbie, it’s important to get trading in a way that you feel 100% comfortable with. We’ve covered “what is forex trading”, so let’s look at how you can actually get started for yourself.
How can I start trading?
Once you fully understand “what is forex” there are numerous ways you can get started with your trades.
The two most common methods of trading forex here in the UK are:
Using a forex CFD, traders can open a position on a currency pair and pre-agree an exchange amount based on the price difference using a CFD contract. This direct approach enables you to take out long or short positions at your own leisure – but you’ll need to know exactly what you’re doing. Less experienced traders might want to try using a broker instead.
Using a forex broker
What is a forex broker? Well, it’s simple: a forex broker is a financial services company that can provide you with direct access to a platform that enables you to trade forex. You’ll pay a small commission fee per trade and may be limited to certain currencies or pairs, but your trades can be managed super easy and positions can be opened and closed at virtually any time. You’ll also be able to contact customer support if ever you have any questions. What’s more, brokers offer customers high leverage, enabling traders to borrow and trade larger amounts. This makes the broker method a great option for high-stakes traders, too.
What Is Forex?: Choosing The Right Broker
So, what is a forex broker? And how can you find the right one to suit you? Forex brokers are sometimes referred to as “currency trading brokers” or “retail forex brokers”, all of which are essentially just third-party companies that offer people a reliable platform for buying and selling foreign currencies.
As we mentioned earlier, you will need to pay a small commission per trade, but in return you’ll be able to streamline your trading experience, by gaining access to a smaller, more manageable portion of the worldwide currency market. You’ll also get access to any apps you need.
Most brokers will allow you to trade between any currencies pairs that make up the 10 “G10 nations”. If you want to dabble in emerging markets or niche currencies, however, you might need to shop around a little more.
What To Look For In A Broker
Here are a few things to look out for when trying to choose the right broker:
Is it safe?
Whether you’ve only just found out about forex and want to start trading, or you’re a seasoned trader looking for a new platform, safety is always paramount.
Here in the UK, you can check with the Financial Conduct Authority (FCA) quickly and easily online to see if the broker you’re considering is properly regulated – so be sure to do so.
Is it easy to make deposits and withdrawals?
The best forex brokers will let customers make deposits and withdrawals hassle-free. Theoretically, there is no reason for a broker to make it difficult for you to access your money, as they are only acting as an intermediary and it’s in their best interest to encourage you to access your account often and trade more.
If deposits and withdrawals sound like a faff, look for a different broker.
What customer service is available?
One of the top benefits of using a broker is that you’ll have someone to turn to if ever the whole forex thing becomes a bit overwhelming and you need some support. Be sure to check a brokers’ reviews online to see what customers have to say about their after-sales support.
Look out for brokers that offer hands-on tech support to keep trades going smoothly and avoid those that have a reputation for ignoring the customer once they’ve registered an account.
What fees are they charging?
While most brokers will charge a commission per trade, there are companies out there that charge through spread amounts instead. This basically means that they’ll collect the “spread amount” between the two prices quoted in a currency pair.
For example, if a GBP-EUR pair sits at 1.20010 / 1.20022 when you open a position, the broker will collect that 0.00012 spread amount when you close at the bid price. Some brokers charge additional fees for software access or special trading products, too.
Once you’ve found a broker, you’ll need to download their trading platform or app, and open a forex account in order to get started.
What Is Forex?: How Do I Open A Forex Account?
Once you’ve found a broker and feel confident that you fully understand “what is forex about”, the next step is to open a forex account. With most brokers, this can usually be done online. You will need:
- Name, address, email and a phone number
- A preferred account currency type (e.g. GBP)
- An initial deposit to be held in your account as collateral
Desired deposit amounts can vary, but most brokers will also want to soft-test your basic knowledge on “what is forex” and how much you understand about financial markets. So, expect to be asked a handful of questions about:
- Your previous trading experience
- Your trading goals and objectives
- Your annual income and net worth
What Is Forex?: How Does Broker Leverage Work?
We’ve already mentioned the fact that traders who go down the broker route can benefit from leverage, but what is this, and how does it actually work? Let’s take a closer look.
Put simply, leverage is an investment strategy which utilises borrowed capital or financial instruments to increase the potential return of an investment. Brokers often offer leverage to customers who use their platform. From the trader’s perspective, this means that extra cash can effectively be borrowed via the broker in order to purchase or bet on currency markets.
How much leverage can I get?
Depending on your country of origin, typical leverage can range from anywhere between 30 and 400 times the amount available in your trading account. This means that traders can potentially buy big to sell even bigger and turn over a profit. The flipside, however, is that there’s a huge risk involved in forex trading with such large sums of borrowed money.
If you’re only just learning “what is forex about”, it might make more sense to ease yourself in gently before trying your hand at such high-stakes trades.
What if I’d rather bid than buy?
Forex trading doesn’t have to be all about buying and selling. One strategy lots of traders in the UK use as an alternative to traditional forex trading is spread betting.
What Is Forex?: Forex Spread Betting Explained
So, what is forex spread betting and how does it work?
Well, spread betting is basically a way of taking advantage of price fluctuations in markets without actually purchasing the underlying assets. This can be achieved by putting up a certain amount of your own capital per point of movement in the market.
It’s worth noting that not all brokers offer spread betting. For those that do, traders will be quoted two prices before a bet is made. These are known as “bid” and “ask” and are defined as follows:
Bid: The highest price that a dealer is willing to pay for an asset
Ask: The lowest price that a dealer is willing to accept.
With Forex spread betting, traders must bet whether the price of the currency pair will be either lower than the bid price or higher than the ask price. The narrower the gap or “spread” between the two, the more attractive the currency pair is deemed to be. This is because pairs with narrower spreads can be entered and exited with relative ease.
What are the benefits of spread betting?
Since spread betting was first established in the mid-1970s, it’s been incredibly popular among traders in the UK and Ireland, on account of the fact that profits gleaned from spread betting are tax-free.
With spread betting, you can:
- Access more than 17,000 markets, including forex
- Take out long or short positions
- Open positions on margin
- Enjoy profits free of capital gains tax and stamp duty
There’s also an added benefit in that the strategy is relatively easy to follow. Traders realistically only have to think about three things: the spread of each currency trade, the direction the trade is going in and the size of the bet they would like to make.
How does spread betting work?
By now you should understand “what is forex spread betting”, but let’s take a look at what it looks like in action.
Let’s say a broker quotes an ask/bid price for the GBP/EUR pair at 1.0015 / 1.0010. Assuming you are expecting the Pound to rise against the Euro, you could place a bet of £0.05 for every point the Pound strengthens above the originally quoted 1.0015. In this scenario, if the Pound rises to 1.0025, you earn £5.
As you can see, the trader does not need to purchase or “own” any physical currency if the spread betting strategy is used. That said, most brokers will still require you to have money in your account in GBP to cover any losses that may need to be debited.
A Summary – What is Forex?
So, what is forex and how does forex trading work? To conclude, what is forex trading is actually pretty simple: it’s the worldwide foreign exchange market. As far as trading is concerned, you can either trade by buying and selling with the view to making a profit through the process of speculation, or you can place spread bets on where the market is going.
Deciding which strategy is best for you may take some practice as a newcomer, but if there are three things you take away from this guide, let them be the following:
- Stick to using a broker at first
- Be sure to choose an FCA-regulated broker that meets your needs
- Be careful when taking advantage of broker leverage
Follow these three tips and you can’t go too far wrong – just remember to be patient and trade (or bet) within your means. On the search for more guides? We’re here to answer questions such as “what is a lot in trading?” and “what is a pip in trading?“. We can even get CFD leverage explained to you.
What Is Forex? FAQ
🤔 How does forex work?
Foreign exchange trading can seem complex and confusing if you’re a first-time trader with a limited knowledge of financial markets. Here at TradersBest, we help newcomers get to grips with financial trading and much more. Check out our site for expert tips and trading guides, or browse our news section to get the latest information on forex, day trading and other financial markets today.
⏰ Will forex be around forever?
Unlike stocks and shares and other types of financial trading, forex revolves around world currency markets and therefore offers boundless opportunities to traders. Some say that forex will be around forever, but is this actually true? And if so, why? Get the latest forex information with TradersBest and keep on top of important news developments and market fluctuations using our news page.
💼 Can forex be a full-time job?
Lots of people here in the UK and further afield rely on day trading, stocks and shares or forex trading as a side-hustle – but is it possible to make a full-time job out of forex trading? Here at TradersBest, our expert reviews, online strategies tips and guides help first-time traders get to grips with forex and other types of trading. Find out how forex works today and what you can do to get started.
❓What is forex trading all about?
Heard rumours about forex trading, but unsure what all the fuss is about? TradersBest’s diverse selection of guides, strategies and reviews can help you get more out of your online trading, gaming or casino experiences. Learn the basics of forex today and discover other amazing online financial or the best cheap brokers to sink your teeth into..
📚 Is forex easy to learn?
Just as with any other financial market, there’s a lot to get your head around when it comes to learning how to trade forex. It’s always a good idea to read plenty of guides, tips and strategies to help you fully understand the basics before you get started. It’s also wise to keep a close eye on the latest news and developments to spot fluctuations in the market and potential trading opportunities.