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Forex Trading Beginner Guide

Foreign exchange trading, often shortened to ‘forex’, or ‘FX’ trading, essentially involves buying and selling currencies. Popular FX brokers such as Oanda, eToro and Saxo Markets.


Forex Trading Beginner Guide

At a simple level, Brits who exchange pounds for a foreign currency at a bureau de change, bank, Post Office or travel agent before heading off on holiday abroad are carrying out forex transactions. Forex traders do a similar thing, but on a grander scale.


The march of technology means it’s also a market that offers opportunities, for those with the right aptitude, to private investors and traders. Here’s a deeper look at forex and the key points to bear in mind.


What is forex trading?

Forex trading involves the speculative buying and selling of currencies in quest of profit. It can also be used to ‘hedge’ existing currency bets against a backdrop of exchange rate fluctuations. (Hedging is where you protect a financial position against the potential of making a loss.)



Converting a few hundred pounds of holiday spending money might not seem like a big deal to any of us individually. But FX is not only the largest market in the world, it’s also the most actively traded.


The numbers are eye-popping. According to the latest triennial (three-year) report from the Bank for International Settlements, global forex trading stood at $6.6 trillion daily in 2019. To put such a sum in context, the amount is more than double the UK’s annual gross domestic product (the measure of the sum total of a country’s entire goods and services).


Open all hours

Individual stock exchanges, such as those in London, Frankfurt and Hong Kong, each work to specific opening hours and are therefore stop-start in nature.


In contrast, forex is an around-the clock market with four main trading hubs working across different time zones: London, New York, Tokyo and Sydney. When trading has stopped in one location, the forex market will continue to operate in another. Forex is also traded in Zurich, Frankfurt, Hong Kong, Singapore and Paris.



Unlike the holidaymaker who needs foreign notes and coins to pay for a cocktail by the pool, forex traders aren’t necessarily looking to take physical delivery of the currencies.

Most forex trading takes place between institutional traders working on behalf of individuals, banks and other financial organisations, and multinational companies. Before the internet, only institutions and wealthy individuals could play the forex market. Times have moved on, however, and private investors now make up a small part of the forex market.


Why is forex traded?

Forex is carried out for a number of reasons, for example, to hedge against international currency and interest rate risk. This is topical at the moment, as world economies grapple with inflation concerns and where interest rate levels have come under particular scrutiny.


Forex is also used to speculate on the impact of geo-political events such as the increase in tensions between Russia and the West over Ukraine. Political events and natural disasters have the potential to alter the strength of a country’s currency significantly, leading to potential trading gains or losses.


Companies make use of forex as well. For example, a multinational headquartered in one location might use the forex market to hedge currency risk resulting from transactions carried out by subsidiaries around the world.



Forex is also a means of providing diversification within an investment portfolio. Because the forex market is open 24 hours a day, five days a week, it provides traders with the opportunity to react to news that might not impact a particular country’s stock exchange till much later.


Ways to trade forex

There are three main ways to trade forex at scale:


Spot market. This is the main forex market where currency pairs are swapped and exchange rates are evaluated in real-time, based on supply and demand.


Forward market. This is where forex traders enter into binding contracts with each other, locking into a particular exchange rate for an agreed amount of currency at a future date.


Futures market. In contrast to the forex and spot markets, this is where traders take out a standard contract on a dedicated exchange to buy or sell a pre-agreed amount of currency at a specific exchange rate on a date in the future.



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As the FX market is one that never sleeps (except at the weekend), 24-hour support from your platform provider is extremely useful. Some services will allow you to automatically open and close positions once certain levels of trading have been reached, ensuring your account is not on the receiving end of a nasty surprise.


To have a chance of making a return, it’s essential to research your chosen currencies. For example, you’ll need to know in advance the dates when countries make public their key economic announcements concerning GDP figures, balance of payments, inflation rates and so on.


Equity markets, interest rates and important news developments also have a role to play in determining a currency’s strength or weakness.



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