Forex Trading Explained
Bet on the movements between currency pairs
Forex trading (also called foreign exchange or FX) isn't about buying or selling currencies themselves. Instead, it’s about correctly predicting a change in the relationship between two currencies – whether the exchange rate will rise or fall.
HOW DO YOU TRADE FOREX?
When trading forex, you are speculating that one currency will rise or fall against another. You are effectively buying one currency while simultaneously selling another. When you close that position you’re doing the reverse — selling the currency you bought and buying the currency you sold. And if the currency you initially bought has increased in value against the currency you initially sold, you’ll make a profit.
When you ‘buy’ GBP/USD you are hoping that sterling will strengthen against the US dollar. So if the pound was worth $1.50 when you bought and rises to $1.52 when you sell, you’ll make a profit. Conversely, if it falls to $1.48, you will make a loss.
Find out about the benefits of forex trading
Forex pairsThe two currencies whose price you speculate on when you trade forex are known as forex pairs or currency pairs.
The most commonly traded pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD and NZD/USD. Known as ‘the majors’, they account for around 85% of all currencies traded.
When you trade on a currency pair you’re speculating that the exchange rate between the two currencies in the pair will change. For example, if you go long on EURUSD, you’ll make a profit if the euro increases in value against the US dollar. But if the Euro decreases in value against the US dollar, you’ll make a loss.
Forex is a truly international marketplace and trading isn’t limited to the normal working hours in your home country. For example, if you want to invest in UK shares, you can only buy or sell them between 8 am and 4.30 pm GMT on weekdays. Similarly if you wanted to trade US shares, you could only do so between 2.30 pm and 9 pm GMT.
Forex trading hours are different. Forex markets open at 10 pm on Sundays and close at 10 pm on Fridays, UK time. This means you can act quickly when you spot an opportunity. 24-hour trading also helps to cut down on ‘price gapping’ — which can occur when prices change while markets are closed.
Traditional investing in any type of asset generally means you’ll need a large amount of capital at your disposal. That’s not the case when you trade forex using a spread bet or CFD. Instead you only need an initial deposit which is just a fraction of the value of the position you are taking. This is known as leverage or margin trading.
Put simply, your initial outlay is a lot lower but you still have exposure to the same large potential gain you could make if you invested directly in the asset. For example, the margin when you trade CFDs on EURUSD is just 0.5% giving you leverage of 200:1.
It also means you’re exposed to the same potential loss and that’s why we include useful – like stop loss and limit orders — with your Spread Co trading account.
Understanding forex marketsThere are several factors that can influence the exchange rate between any two currencies
Understanding what they are and their likely impact will help you decide how and what to trade. These factors include the political climate in the countries involved and their interest rates. Many traders look for changes in interest rates as a signal that forex trading opportunities will arise.
Other factors include the amount of public debt, the approach to monetary policy taken by central banks and even natural disasters, such as earthquakes and flooding. Our News and Education pages help you stay up to date with financial news and economic data.
How to trade forex?With Spread Co there are two ways to trade forex – spread betting and contracts for difference.
Forex spread bet profits will always be in your account currency. When you trade forex using CFDs any profit will be in the counter currency.
Whichever you choose, you’ll be able to carry out your trades on our easy to use trading platforms for mobile, iPad and web.
The difference between the buying (ask) and selling price (bid) in a currency pair is called the spread and this is effectively the cost of your forex transaction. The size of the spread will vary between currency pairs and can be as low as 0.8 for EURUSD when spread betting.
Some companies will offer variable spreads. This means that the size of the spread can change through the trading day. For example they might advertise spreads as low as 0.75, but these can increase to as much as five points at certain times of the day. If you’re forced to close a trade at a point when the spread is at its widest, this could have a serious impact on your potential gain.
At Spread Co all of our spreads are fixed. And when you trade forex, they never change, no matter when you open or close a position. This means you can trade confidently, knowing that the spread when you close a position will be the same as it was when you opened the position.
Forex pricingWe price all our currencies to five decimal places, except for Japanese Yen
The first currency in the pair is known as the base (or primary) currency. The second currency is known as the counter or quote currency. When you go long you’ll be buying the base currency while selling the counter currency. When you go short you’ll be buying the counter currency while selling the base currency.
Forex trading with Spread Co
Spread Co offers more than 38 currency ‘pairs’ you can trade with. We offer some of the lowest FX spreads in the industry – from just 0.8 points for EUR/USD. See market information for more details.
Why Trade Forex?
These forex trading examples show you how we calculate your margin for forex spread betting and CFD trades. They also show how we calculate potential gains or losses
Spread betting example
In this example, you believe sterling will weaken against the US dollar and take a short position on GBPUSD (our product which mirrors the Spot GBP/USD market).
Our price for GBPUSD is 1.55713 (Bid) and 1.55723 (Offer). Our spread on this trade is 1 point.
You decided to go short at £5 per point. You place a limit order of 1.54983 and a stop loss of 1.56083.
£1 per point on GBPUSD is equivalent to £15,572.30 Notional Value
For your £5 per point bet, your margin is calculated as:
MARGIN RATE x TRADE VALUE = MARGIN REQUIREMENT
0.5% x (5 x £15,572.30) = £389.31
|The exchange rate falls to 1.54983 (your limit order value)||The exchange rate rises to 1.56083 (your stop loss value)|
|Original bid price minus your limit order multiplied by trade size||Original bid price minus your stop loss multiplied by trade size|
|(155713 – 154983) x £5||(155713 – 156083) x £5|
|Profit £365.00||Loss £185|
When spread betting with Spread Co your profit is always in the same currency as the one you used to place your bet. So, if your bet is in GBP, your profit is in that currency, even if you were to bet on EUR/USD.
When you spread bet on forex with Spread Co
CFD Trading Example
In this example, you believe the euro will strengthen against sterling and take a long position on EURGBP (our product which mirrors the Spot EUR/GBP market).
Our price for EUR/GBP is 0.84883 (Bid) and 0.84903 (Offer). Our spread on this trade is 2 points.
You decide to go long 100,000 contracts. You place a limit order of 0.85350 and a stop loss of 0.84650.
For your 100,000 contracts, your margin is calculated as
number of contracts x mid price x margin
100,000 x 0.84893 x 0.5% = £424.46
|The exchange rate rises to 0.85350 (your limit order)||The exchange rate falls to 0.84650 (your stop loss value)|
|Limit order minus original offer price multiplied by trade size||Stop loss order minus original offer price multiplied by trade size|
|(0.85350 – 0.84903) x 100,000||(0.84650 – 0.84903) x 100,000|
|Gross profit = £447.00|
Financing (7 days) = £17.50
Net profit = £429.50
|Net loss = £253.00|
Financing (7 days) = £5.60
Gross loss = £258.60
When you trade forex CFDs with Spread Co
- Margins are as low as 0.5%
- Spreads are fixed 24 hours a day
- Choose from 38 currency pairs
*Tax treatment depends on your individual circumstances and tax laws can change or may differ in a jurisdiction other than the UK.