Digital brokerages and online trading platforms make forex trading more accessible than ever – but it isn’t the same as trading on equity markets.
The most important aspect of setting yourself up for successful forex trading is understanding all the ins and outs and creating a tailored trading strategy that reflects your intentions, risk appetite and approach.
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Brokers offer a broad range of trades, such as spots, CFDs (contracts for a difference) and futures, but you should research any prospective broker before you set up an account to ensure they have trading structures and fees or spreads that match your requirements.
How To Pick A Forex Broker
Picking a good forex broker is half the challenge since a competitive trading account, low spreads and comprehensive knowledge centre can provide much of what you need as a trader.
Low spreads
In forex, spreads are determined by pips and show you the variance between the price you can purchase a currency and what it is worth in a sale transaction.
High spreads, i.e. a difference between those prices, means the broker charges more to facilitate your transaction. This is because they earn the spread rather than charging a transaction fee or commission.
Low spreads make forex brokerages cheaper.
Regulated brokers
Any UK forex broker should be properly registered with and authorised by the Financial Conduct Authority and have a registration number you can verify on the FCA website.
Some brokers are linked to lenders or banks primarily because they use the backing to fund the capital provided to traders as leverage against their transactions.
If you work with a foreign forex broker, you might not benefit from the same consumer protections, and there is a risk that some products offered are not compliant with UK laws.
Trading Tools
The tools and analytics resources available through forex brokers vary, but the ideal is to find a broker with the features you will be most likely to use, such as:
- Real-time pricing charts
- Technical analysis tools
- News and reporting
- Research materials
- Economic calendars
- Information on fundamental indicators
Most good forex brokers will allow you to open a demo or dummy account to practise trading strategies and may permit access to the trading tools and platforms available so you can test these and see whether they meet your needs.
Leverage limits
Leverage is the ratio showing the capital available vs deposited funds and how much you can borrow from your broker.
For example, if you had a leverage cap of 100:1, you could borrow £100 for each £1 you put down as a margin towards a trade.
Brokers offer varying leverage limits, and a lot depends on how much you expect to trade and the level of loss exposure you are willing to accept.
Traders with limited capital can find high-leverage availability through broker margin accounts, but this may be less important if you have significant money to invest.
You may also be happy with a lower-leverage account if you do not wish to avoid absorbing the higher risk associated with a trade leveraged to the higher possible ratios.
Forex account types
Most brokers offer a range of accounts, starting with mini accounts that allow you to trade in the smallest possible lot sizes. The minimum deposit is often around £250, although some brokers let you open an account with zero deposit.
Standard accounts trade in 100,000 lots of currency units, so they are better suited to experienced traders or those with sufficient capital to trade at this level.
What To Avoid In Choosing A Forex Broker
While most regulated brokers are above board, their practices and pricing structures are likely less beneficial.
Sniping and hunting mean a broker buys or sells currency according to pre-set price points and before the market has responded.
These actions are detrimental to traders and can skew their results. Still, since forex has no overseeing body, you will most likely find out whether a broker engages in these activities through the forex community.
Another undesirable is a broker with unusual margin rules because the broker controls some aspects of your risk exposure.
For example, if you have a margin account, you could see a drop in your position before an equally fast rebound to a new high. You could lose out significantly if the broker liquidates the position on a margin call at a lower price.
Once you have selected a reputable broker and are happy that their services are suitable, you need to set up a trading account like you would with any online equity trading platform.
Most brokers ask you to commit to a margin agreement that clarifies you know what leverage means and will allow your broker to intervene to avoid you accruing heavy losses.
Forex Analysis Options
Forex traders usually combine technical and fundamental analysis to track movements and decide when to enter or exit positions – a focus on technical analysis is more common.
Technical analysis in forex
This type of analysis looks to assess pricing trends as you might in an equity market, using different timeframes to determine how and when currencies might rise or fall.
Unlike equities, forex is open 24/7, so most traders will use tools that account for 24-hour trading periods, such as parabolic SAR or pivot points.
Studying indicators can help traders predict future events or create strategies to pick entry points when the market replicates specific conditions.
Forex fundamental analysis
Fundamental analysis is more generalised and works similarly to how national economics might change. However, this process is complex and is better suited to long-term trend predictions.
However, there are scenarios where immediate currency prices change quickly due to a news release, event or political announcement.
Like technical analysis, traders use a range of tools or reference points, such as the Consumer Price Index, to try and glean when economic movements impact forex.
Traders will pore over interest rate comments from central banks, government instability or leadership changes, monetary policy announcements, inflation reports and interest rates.
Each of these can affect currencies, so forex traders need to understand the broader economic climate to understand how that could influence their trades, profits or losses.
Economic calendars are available on forex brokerage platforms and help remember when events, news reports or announcements are expected. Brokers may also provide updates and news bulletins when economic data is published.
Building A Forex Trading Plan
The final step to getting started as a forex trader is to decide on your strategy, although you can expect to tweak and amend this over time as your trading skills develop.
Some traders use specific calculations, indicators or metrics to make decisions, whereas others use a broader analysis approach to decide how to move forward.
Most forex experts recommend combining technical and fundamental analysis for long-term market projections and backtracking that data to decide on the correct entry or exit positions in the short term.
However, your trading strategy has to be specific to you rather than adhere to other trading styles that might not be compatible with your risk acceptance levels or capital investment available.
A trusted strategy helps you make informed, considered judgements, and ensure that any positions conform to your overarching objectives.
You can stipulate when stop-loss or take-profit orders will execute, with automated trades to ensure your positions are updated when the markets hit specific points without needing to be watching trends around the clock.
Getting Started As A Forex Trader FAQS
How does forex trading work?
Forex, or foreign exchange markets, allow traders to buy and sell currencies using paired currencies such as EUR/USD or USD/CAD.
The market is the most heavily traded globally, with the highest international liquidity.
What are spreads in forex?
Spreads show the price differences between the buy and sell quotations for the same currency pair. Forex brokers use spreads to make profits rather than charging commissions.
What does a narrow spread mean?
Narrow spreads are typical in markets with greater liquidity. Because the broker spends a smaller spread than the trader, the higher the spread, the more they make.
How do forex dummy accounts work?
Dummy or demo accounts are tools offered by most forex brokers that traders use to test trading strategies or ideas against market metrics.
No money is involved, so you simulate a trade to see how it would work in the live markets without taking any risk.
Do all new forex traders need to start with a demo account?
It is highly advisable since any untested strategy could backfire and lead to considerable losses.
Demo accounts can finesse trading strategies or act as a learning tool where trial and error don’t hold any risk.
However, demo accounts aren’t solely for more than just beginners – experienced traders and seasoned investors use them to verify whether their plan is as profitable as they hope.
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