This forex trading guide is a great starting point for anyone looking to trade the currency markets. Our guide will help you to understand the following:
What is Forex trading?
The forex markets are very liquid, meaning it is easy to buy and sell currencies, and the forex market is open all day.
The global foreign exchange market opens in Australia on Monday morning, and closes in New York on Friday evening.
This is because currency prices are so important to the day-to-day operation of the global economy that market participants (like banks) cannot afford to have the market closed at any point in time during the week.
It is also possible to open a dedicated forex trading account with many banks and brokers which will give you access to a wide range of currencies.
For those of you in the United States, where spread betting and Contracts for Difference are not available, you can still open a forex trading account with a specialist forex broker.
What financial markets can you trade?
Forex trading lets you trade any liquid currency against any other. Bear in mind, you are not bound by your home currency. Just because you get paid in pounds or euros does not mean you can only trade these currencies against foreign currencies.
All currencies have a three letter code to designate them, from AUD for Australian dollar to ZAR for South African rand. Currencies are quoted as pairs. You cannot trade them in isolation. You have to trade one currency against another.
We’ve put together a series of short forex trading guides to the most traded currencies in the world to help you understand them a little better.
How do the buy and sell prices work?
Your broker platform may be offering EUR/USD quoted at 1.3225.
This means that you need 1.3225 of the currency on the right (in this case the US dollar) to buy one unit of the currency on the left (one euro).
The currency will usually be quoted as a ‘spread’: this means it will have a ‘buy’ price and a ‘sell’ price. You use the buy price if you think the price will go up, and the sell price if you think it will go down.
In the above example, you might see EUR/USD 1.3218-1.3219. The number on the left is the sell or ‘bid’ price (which you would use if you think it is going to go down), the number on the right is the buy or ‘offer’ price (used if you think it is going to go up).
For currency ‘majors’ – namely the most widely traded currencies issued by the biggest economies, like the US dollar, the euro, and the yen – you should expect to see very ‘tight’ spreads (only one or two points of difference between the bid/sell price and the buy/offer price).
What are pips?
FX traders refer to the tiny difference in forex prices as ‘pips’ – 0.0001 would be one pip in the case of the EUR/USD currency pair, but this can change depending on which currencies you are trading.
AUD/JPY is typically quoted with two decimal places, because it takes a double figure amount of yen (e.g. 85.10) to buy a single Australian dollar.
Is Forex trading risky?
Forex trading usually requires high amounts of leverage. This is because the daily or weekly change in the value of a currency pair is small, much smaller than other financial markets.
It is why Forex brokers will lend their customers money with which to trade, and hopefully make money. This is called ‘trading on margin’, with margin being the amount of money you are depositing for the trade. As an FX trader, you will usually only need to finance a small portion of the overall value of your trade.
A 1% margin rate is typical in foreign currency markets these days. This is the amount you need to deposit to open the trade.
Your broker will put up the rest.
How do I manage risk?
Be warned: trading on margin means you are magnifying the total size of your trade. A 1% margin rate means £100 of your own money is being turned into £10,000 in the forex market. If you trade successfully, you can pocket the profit a £10,000 forex trade would bring you. If you take a loss, you are responsible for the loss to a £10,000 trade, NOT your £100 margin.
Therefore, it is possible to lose more money trading on margin that you originally deposited.
With this in mind, it is important that you protect yourself against losses by using a stop loss. A stop loss is an automatic instruction to close your trade at the price you specify. It means you can limit your loss in advance and protect yourself from exposure to trades that significantly move away from you.
Changes in regulations in 2018 have limited the amount of margin that inexperienced traders have access to and typically, the margins offered above are available only to professional traders,
What is the best Forex trading platform?
To really start to understand forex trading, you’ll need to test yourself against the currency markets. Here at The Armchair Trader, we always recommend starting off with a demo account.
The reason? A demo account provides two valuable insights. Firstly, it will provide you with the chance to test out a platform before you commit real money; and secondly, test out your trading strategies with real prices.
The majority of forex brokers will offer a demo account. We would urge you to give your chosen platform a test drive before you begin trading for real.
Muslims are typically advised to open Islamic Forex accounts that practice Shariah principles. These Islamic forex accounts, also known as swap-free accounts, are halal trading accounts in which interest is not accumulated, collected or paid. These accounts do not make use of futures and forward contracts. All transactions (including the transaction cost) take place without any delay. You can read our thoughts on whether trading is Halal or Haram and explore a small selection of regulated brokers offering permissable accounts.
Find a full list of regulated forex brokers here. Navigate further and we’ll provide you with a detailed review of each broker and, most importantly, our impartial view on their products and services.
We would urge you to check that your chosen broker is authorised and regulated by the appropriate regulatory body. For example, the UK’s Financial Conduct Authority (FCA) provides a Financial Services Register which includes all brokers that are authorised and regulated in the UK. Please check the appropriate register before you commit funds.