Forex trading is very popular among investors in the UK these days. It can be a highly lucrative activity, with the right skills and given the right conditions. For a beginner, it can be quite overwhelming, what with all the strange jargon and new concepts to learn. But if you are really interested in becoming a successful forex trader, it really only takes some determination and practice. In this article, we will take you through the basics of forex trading and equip you with everything you need to get started.
A Brief Introduction to the Foreign Exchange Market
The foreign exchange market is an international market where different currencies are bought and sold for a profit. It is by far the biggest market in the world, with a value of approximately $795 billion as of the most recent data. It is also a highly liquid market, with currency prices frequently fluctuating due to a number of factors.
How Does Forex Trading Work?
The main goal in forex trading, pretty much like in other stock markets, is to buy one currency with another. These two currencies make up the currency pair. In every pair, the first currency mentioned is called the base currency, and the second is the quote currency.
Traders aim to buy when the price is low and sell when it is high, thereby earning a profit. These prices change constantly so one must be extremely vigilant, or have excellent trading tools in place, in order to know the perfect timing of when to buy or sell.
Unlike the stock market, there is no physical place where one can go to buy and sell currency pairs. Thus, if you want to get into the forex trading action, you would need to find an online forex broker who will provide you the platform to make your trades. It is also through the forex broker that you can access trading software, tools for analyzing market trends, educational material to improve your trading strategies, and many more.
Different Types of Currency Pairs
All the currencies in the world may be traded in the forex market. However, there are certain currency pairs that are much more popular and more frequently traded than others. Hence, currency pairs are classified into three categories – major currency pairs, exotic currency pairs, and minor currency pairs.
The major currency pairs are EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. As much as 75% of all forex trading involves these currency pairs, which are by far the most liquid in the market. The spreads that forex brokers offer on these pairs are also lower compared to the spreads of other forex pairs.
Minor currency pairs are those that include either the EUR, GBP, or JPY, but do not include USD. Finally, exotic pairs are all other currency combinations that are not major or minor pairs. Exotics have the lowest liquidity and are subject to large and sudden price fluctuations.
Some Fundamental Forex Trading Concepts to Understand
Now that you have a pretty good idea of what forex trading is and how it works, the next step on how to trade on forex in the UK would be to learn the jargon. Everything might sound scary and foreign at first but once you know what the words mean, it won’t be so intimidating anymore.
Bid-Ask Spread
The spread simply refers to the difference between the bid price and selling price and the ask price or buying price of a currency pair. In general, the tighter the spread, the better for the trader, since this helps reduce the overall trading cost. A low spread also generally indicates higher liquidity, which means more opportunities for making a profit on the particular currency pair.
Pip
This is the unit used to measure the spread of a currency pair. It stands for Percentage in Point, or Price Interest Point. It refers to the minimum value that a currency price changes, which then determines how much the traders might gain or lose with each trade.
Lot
This refers to the amount of base currency that is being traded in forex trading. A standard lot consists of 100,000 units of the base currency. This might be too large for many new traders, in which case the mini lot is available, equivalent to 10,000 units. Even smaller is the micro lot, which consists of only 1,000 units of the base currency.
Leverage
The simplest definition of leverage is borrowed money. By offering leverage, a forex broker essentially allows an investor to trade much bigger positions than what they can afford with just the funds that are in their account. For example, with a 1:10 leverage, the $1000 that you have in your account can let you trade as much as $10,000 worth of currency, thus magnifying your profit potential. However, it also increases the risk for loss by the same amount, which is why the use of leverage can put you in a very precarious position.
Stop-Loss
This is a special forex trading feature that traders can use if they want to close a position when it reaches a pre-determined price. As its name suggests, this order can protect the trader from suffering further losses if the position stays open despite negative market conditions.
Take-Profit
Similar to the stop-loss, the take-profit order works in the opposite way, immediately closing the position as soon as the predetermined price is reached. This ensures the profits for the trader and saves it from turning into a loss should the price movement reverses.
How to Trade on Forex in the UK Using Various Trading Strategies
It might take a while to learn all the forex trading strategies that you can use but for now, know that there are many different kinds available. For beginners, the most commonly used strategies are the following.
Day Trading
This is one of the simplest trading strategies where a trader opens a position at any time during the day, and closes all open positions at the end of the trading day. This way, there are no overnight positions that you need to worry about, which comes with fees and other considerations.
Scalping
For new traders who are up to the challenge of a more fast-paced trading, you can try scalping. This is an excellent strategy that can yield significant returns in a short period. However, scalping is not for the faint of heart and requires a lot of focus and quick decision making. There are plenty of profit opportunities using this method if you are able to apply it properly.
Trend Trading
Another highly recommended strategy for beginners is trend trading because it does not require much technical skill. It also will not glue you in front of the monitor all day because this trading strategy is long-term. You do need to understand how your chosen currency pair moves in the market and follow the trend of the pair so that you can open and close positions accordingly. If you are able to follow the rules of this strategy well, you are in for lucrative profits.
Other than these, there are many more ways of how to trade on Forex in the UK, such as swing trading, carry trading, news trading, and breakout trading.
A Beginner’s Steps on How to Trade on Forex in the UK
Once you have adequate fundamental knowledge on forex trading, you can start taking more concrete steps towards becoming an actual trader.
Step 1: Choose a Forex Broker
There are dozens of online forex brokers that accommodate traders from the United Kingdom, so you will be spoilt for choice. However, not all of these brokers are equally reliable. Make sure you examine each broker carefully before you sign up, paying close attention to their regulation, fees, trading platforms, and other features. We will discuss this in more detail later on in this article. If you are planning on trading forex on the go, you should also check whether the broker has a mobile app that you can use for trading conveniently even while you are avail from your desktop.
Step 2: Open an Account
Forex brokers generally will not give you a hard time with the account opening process. All you have to do is go to the official website of the broker, click on the signup link, and fill out the required information. You would need to verify your identity, which is important for the safe transfer of funds later on.
Demo Account
At this point, it would be useful to know that most brokers offer a demo account that is free for anyone to use. This is a great means for you to learn the ropes of the trading platform, and develop a trading strategy that would work for you. Typically, a demo account lets you do everything that you can do on a real forex trading account, complete with access to all the tools for analysis, charting, and whatnot, except that you don’t need to spend any money. Of course, you won’t earn anything as well, even if you make profitable trades. What you can get is more valuable, though, and that is improved skill and experience as a trader.
Step 3: Deposit Trading Funds
Once your account has been verified, you can transfer the funds you are going to use for trading. Take note that brokers have varying minimum deposit requirements. With some brokers, you must deposit at least $100 as initial capital. Other brokers do not have a minimum, which means you can start trading with as low as $1 in your account. Of course, with the use of leverage, you can make big trade positions even with a limited budget.
Step 4: Choose a Currency Pair and Begin Trading
For newcomers to forex trading, it is strongly recommended to stick with the major currency pairs since these are the more stable ones with lower volatility. More adventurous traders might also want to try other currency pairs with more fluctuation. It is also wise to learn about the economic background of a currency pair before starting to trade, as these will heavily affect the values of the currencies involved.
Choosing the Best Forex Broker
One’s success as a forex trader depends heavily on choosing the right broker to work with. Since forex trading is now a very popular activity in the UK, brokers have been quick to rise to the demand, and there are now dozens of really good ones to choose from. This makes the task of picking just one a little bit more challenging. To help you make the right choice, here are some of the most important aspects that you need to take into consideration.
Regulation
Forex trading is a perfectly legal activity in the United Kingdom. However, not all forex brokers who offer their services in the country might be duly licensed. Before you choose a trader, make sure they are regulated by the Financial Conduct Authority or another tier 1 regulatory body. This is a trader’s best assurance that the broker is reputable and abides by the global rules in the forex trading industry.
Trading Costs
Each forex trade comes with a cost, either in the form of spreads, commissions, a variety of non-trading costs, and so on. It would be ideal to find a broker that charges the least amount of fees, but doing this is not always simple. Some forex brokers advertise spreads that start at 0.0 pips, which is certainly very attractive. But you would still have to check the other costs, as they might be charging a steep commission.
Trading Platform
The forex trading platform gives you access to the forex market. This is where you can execute your trades, and make use of technical and analytical tools to aid in your trading experience. Most forex brokers in the UK offer more than one trading platform like the popular MetaTrader 4 and MetaTrader 5. Many brokers now also have their own proprietary platforms, which might come with a bundle of additional useful features and tools. There are also some really good social trading platforms for copy traders. Make sure you shop around thoroughly and check the platforms offered by a broker before you sign up.
Tradable Assets
Some forex brokers offer just a handful of currency pairs for trading, while others have nearly a hundred. It’s not so much the number of pairs available that you should look at, but the availability of the particular pairs that you wish to trade. In addition, if you are interested in expanding your portfolio to other instruments in the future, you might want to explore the other offerings that the broker has, such as indices, stocks, and commodities.
Deposits and Withdrawals
Fund transfers are an integral part of how to trade on Forex in the UK. Since you are going to be doing these transactions often, it pays to check the ease of the process. Make sure the broker offers payment methods that you prefer. At the same time, you should also compare the fees and processing times of different brokers.
Customer Service
As a global market, the forex market is open 24 hours a day. This is why it is crucial that you choose a broker that offers dependable, round-the-clock customer service. Should you wish to exit a position in the wee hours of the morning and encounter a hiccup, a customer support representative should be able to attend to your concern right away so that you can avoid suffering potentially massive losses. To avoid these inconveniences, it would be smart to test the quality of a forex broker’s customer service prior to even signing up for an account.
Conclusion
Forex trading in the UK comes with the opportunity for great profits as well as the risk for insurmountable losses. Make sure you exercise caution in your trading activities so that you increase the odds of a positive outcome.
