How to trade forex

Forex trading steps

Learning how to trade any market can seem daunting, so we’ve broken forex trading down into some simple steps to help you get started:

• Decide how you’d like to trade forex
• Learn how the forex market works
• Open an account
• Build a trading plan
• Choose your forex trading platform
• Open monitor and close your first position

Decide how you’d like to trade forex

A lot of forex trading takes place between major banks and financial institutions, which buy and sell massive amounts of currency every single day. For individual traders who don’t have the means to make billion-dollar forex trades, though, there are two main ways to get involved: forex CFDs or trading forex via a broker.

What is a forex CFD?

A forex CFD is a contract in which you agree to exchange the difference in price of a currency pair from when you open your position to when you close it. Open a long position, and if the forex position increases in price you’ll make a profit. If it drops in price, you’ll make a loss. Open a short position, and the opposite is true.

Forex trading via a broker

Forex trading via a broker – or sometimes via a bank – works in a broadly similar way to CFD trading. You’re speculating on the price movements of currency pairs, without actually taking ownership of the currencies themselves. If you think a currency pair’s price is headed down, you can go short instead of long.

When you trade forex via a broker, though, you won’t have access to other markets.

Learn how the forex market works

One of the first things to learn when you want to trade currencies is how the forex market operates, which is very different to exchange-based systems such as shares or futures.

Instead of buying and selling currencies on a centralised exchange, forex is bought and sold via a network of banks. This is called an over-the-counter, or OTC market. It works because those banks act as market makers – offering a bid price to buy a particular currency pair, and a quote price to sell a forex pair.

Trading via forex providers

Most retail traders won’t buy and sell forex directly with one of the major banks – they’ll use a forex trading provider. Forex trading providers deal with the banks on your behalf, finding the best available prices and adding on their own market spread.

Some providers will allow you to interact directly with market makers’ order books. This is called direct market access, or DMA, and means advanced traders can buy and sell forex without the spread – instead trading at the prices offered by currency providers, plus a variable commission.

Open an account

If you want to trade forex via CFDs, you’ll need an account with a leveraged trading provider.

You can open an IG account in minutes, and there’s no obligation to add funds until you want to place a trade.

Build a trading plan

Building a trading plan is particularly important if you’re new to the markets. A trading plan helps take the emotion out of your decision making, as well as providing some structure for when you open and close your positions. You might also want to consider employing a forex trading strategy, which governs how you find opportunity in the market.

Once you have chosen a particular forex trading strategy, it’s time to apply it. Use your favoured technical analysis tools on the markets you want to trade and decide what your first trade should be.

Even if you want to be a purely technical trader, you should also pay attention to any developments that look likely to cause volatility. Upcoming economic announcements, for instance, might well reverberate across the forex markets – something your technical analysis might not consider.

Choose your forex trading platform

Our trading platforms can provide you with a smart and faster way to trade forex. You can trade via the IG trading platform in:

• Your web browser
• One of our mobile apps
• Advanced third-party platforms like MT4

​Each of our forex trading platforms can be personalised to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.

Open, monitor and close your first position

Once you have chosen your platform, you can start trading. Just open the deal ticket for your chosen market, and you’ll see both a buy and a sell price listed. You’ll also be able to decide the size of your position and add any stops or limits that will close your trade once it hits a certain level. Hit buy to open a long position or sell to open a short position.

You can monitor the profit/loss of your position in the ‘open positions’ section of the dealing platform.

Once you’ve decided it’s time to close your position, just make the opposite trade to when you opened it. Now, let’s take a look at some examples of forex trades and their possible outcomes.

Forex trading examples

Trading a GBP/EUR CFD

GBP/EUR is trading at 1.1284, with a buy price of 1.1285 and a sell price of 1.1283, giving it a spread of 2 points. You think that the pound is set to gain value against the euro, so you decide to buy the market at 1.1285.

The size of a CFD position is measured in contracts, with each contract equal to a single lot of the base currency in the pair. In this case, buying a single GBP/EUR CFD is the equivalent of trading £100,000 for €112,850. You decide to buy three CFDs, giving you a total position size of €338,550 (£300,000). This means you’ll earn €30 for every point of movement.

CFDs are a leveraged product, so you don’t have pay the full value of your position upfront. GBP/EUR has a margin factor of 3.33%, so you’ll need to commit €11,273.71 as margin.

If your prediction is correct

The pound rises against the euro, and GBP/EUR is now trading at 1.1309, with a buy price of 1.1310 and a sell price of 1.1308. You reverse your trade to close your position, so you sell three contracts at 1.1308.

Your £300,000 is now worth €339,240, because 1.1308 x (100,000 lot size x 3 CFDs) = €339,240. €339,240 – €338,550 = €690, which is your profit from the trade. You could also calculate this as 11308 – 11285 = 23, which you multiply by €30 per point to get €690.

As ever, you’d have had to pay funding charges if you kept your position open overnight.

If your prediction is wrong

The pound falls against the euro, and GBP/EUR is trading at 1.1259, with a sell price of 1.1258.

1.1258 x (100,000 lot size x 3 CFDs) = 337,740, which means your three contracts are now worth €337,740, €810 less than when you opened your position. Another way to calculate this is to subtract 11258 from 11285, which gives you a loss of 27 points. 27 x 30 euros per point = €810.

As this is a losing trade, you can offset a CFD loss against future profits for CGT purposes. * You will have paid funding charges if you held the position overnight, however.