When you trade forex, you trade currencies on the foreign exchange market, a decentralised global market for the trading of currencies. Currencies are traded through a broker or dealer and are traded in pairs.
Each currency has a unique code, always traded in pairs. The most favoured currency pairs are EUR/USD (Euro/US Dollar), GBP/USD (British Pound/US Dollar), USD/JPY (US Dollar/Japanese Yen), USD/CHF (US Dollar/Swiss Franc), AUD/USD (Australian Dollar/US Dollar), and NZD/USD (New Zealand Dollar/US Dollar).
The Forex market is open night and day, five days a week, and is constantly moving, so you need to make quick decisions when trading.
Forex trading is legal in the UK, but there are a few things you need to know before you start trading.
Forex trading is risky
The Forex market is volatile and can move quickly, so you need to make quick decisions when trading. You can lose or gain money very quickly, so it’s essential to do your research before you start trading.
It would be best to have a broker or dealer
You can’t trade currencies on the Forex market without a broker or dealer. Brokers are the middleman between traders and the Forex market, and dealers are the ones who make the trades. There are several different brokers and dealers to choose from, so do your research before choosing one.
You need to understand basic forex terminology
Before you start trading, it’s essential to understand some of the basic terminologies:
A pip is the tiniest unit of change in a currency pair. For example, if the EUR/USD currency pair moves from 1.1850 to 1.1851, that is a one-pip move.
Leverage is the ability to control a large amount of money with small capital. For example, if you have $1,000 in your account and you’re trading with 100:1 leverage, you can control $100,000 worth of currency.
Borrowing money from a broker enables investors to trade larger positions in currency. Consequently, leverage brings increased returns on favorable changes in exchange rates. However, since leverage is a double-edged sword, losses can also be large. It is important for forex traders to know how to manage leverage and exercise risk management strategies to reduce forex losses.
Margin is how much you need to put down to open a trade. Margin needs tend to vary by broker, but they are typically 2% or 3% of the trade value. Meaning a trader needs to have $2,000 in their account to place a $100,000 trade.
The amount of margin required can vary by brokerage firm and has several implications related to practice. A margin of 1% is not uncommon in the Forex market. For example, this implies that a trader is eligible to control $100,000 of the currency with $1,000.
You need to know the different types of orders
When you’re trading on the Forex market, you’ll need to use orders to control your trades. There are four different types of orders:
A market order is an order to buy or sell a currency pair at the current market price. It is considered a default buy and sell choice for most investors probably most of the time. If the asset is a large stock or a popular exchange-traded fund (ETF), there will be many buyers and sellers.
A limit order is an order to buy or sell a currency pair at a specific price. Limit orders enable investors to set a maximum allowable buy price or minimum allowable sell price when making an order. The order will be fulfilled only on the account when the asset reaches this price.
You can use a stop order to buy or sell a currency pair when it reaches a specific price. When a specified amount price is reached, the limit order converts to a market order. The advantage of a stop order enables you that you don’t have to monitor the stock’s movements every day. The downside is that buying or selling the stop price can be triggered by short-term share price movements.
A stop-loss order is when you sell a currency pair when it reaches a specific price. Stop Loss is designed to limit an investor’s losses in a security. For example, if you set a Stop Loss 10% below the purchase price of the stock, your loss will be limited to 10%.
You need to know how to read a currency quote
When you’re trading on the Forex market, you’ll need to be able to read currency quotes. A currency quote is a two-part price that shows how much of one currency you need to buy or sell to get one unit of another currency.
The first part of the quote is the base currency, and the second part is the quote currency. For example, the Euro is the base currency in the EUR/USD currency pair, and the US dollar is the quote currency.
It would be best to manage your risk
When you’re trading on the Forex market, you need to make sure you’re managing your risk. You can do this by using stop-loss orders and limit orders.
It would be best to have a trading plan
Before you start trading on the Forex market, you need to have a trading plan. Your trading plan should include your goals, strategies, and risk management plan.
It would help if you were disciplined
Trading on the Forex market can be exciting, but you need to stay disciplined if you want to succeed. Ensure you follow your trading plan and don’t let your emotions get the best of you.
Want to see how the forex market works? You can see it here.
To conclude, forex trading is legal in the U.K. provided that it is offered by a broker that is properly authorized and regulated by the FCA — a requirement that will also protect you from dealing with a scam broker. That’s why it is critical to only use a trusted forex broker that holds a valid regulatory status with the FCA.