Thadeus Geodfrey and finance are inseparable. He is a versatile expert with a strong cryptocurrency and market analysis background. Thadeus provides a unique blend of technical and strategic insights as a seasoned financial writer. His overarching probe and attention to detail inspire the InvestingGuide community. He guides you through the continuously evolving market landscape to build solid investments or make successful trades.
Fact checked
Advertising Disclosure
We may receive compensation from our partners for placement of their products or services, which helps to maintain our site. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn’t influence our assessment of those products.
As the world’s largest and most liquid market, with over £5 trillion exchanging hands daily, the forex market offers massive opportunities, making forex trading an attractive venture for many. Today, whether on TikTok, Facebook, Instagram Reels, or Twitter, people are discussing how to make money trading forex. But can one ever make money through forex trade in the UK?
The answer is yes, but only if you are skilled enough. As a beginner in the forex market, you’ll find it confusing without the proper knowledge and skills. If not trained and mentored well, you can easily suffer huge losses. But that shouldn’t be the case. All you need is commitment and a good attitude; from the look of things, you already have them; otherwise, you wouldn’t be here. This article helps you get started start trading forex in the UK.
In This Guide
What is Forex Trading?
Traditionally, when you had the British Pounds (GBP) but wanted them in US dollars, you’d walk into a forex exchange bureau or a bank and do the exchange over the counter. This process of exchanging one currency to another at an agreed rate per unit price is forex exchange.
When you convert currencies for practical use and not for profit, that’s currency conversion or forex exchange. But when you do this exchange to benefit from price fluctuations, that’s forex trading.
Simply put, forex trading is to speculate on currency price movements to make a profit.
Forex traders predict price movements intending to capitalise on the margins.
The forex market is globally decentralised today, adding to the over-the-counter (OTC) option. You can exchange the currency right in your hand without moving an inch.
How Does Forex Trading Work?
Forex, a foreign market, or simply FX, is the marketplace constituted by brokers, a network of banks and financial institutions that facilitate the buying and selling currencies. It’s open 24 hours a day, five days a week, allowing traders to trade currencies anytime.
In forex trading, currencies are paired, such as GBP/USD (British Pound/US Dollar) or EUR/GBP (Euro/British Pound), implying that one is exchanging for another.
To understand how forex trading works, you must understand its basic concepts, which include:
Currency Pairs
In forex, currencies are in pairs. The first currency in the pair is the base, while the second is the quote.
The price of a currency pair shows how much of the quote currency is required to buy one unit of the base currency.
Bid and Ask Prices
Two fundamental prices are essential in forex trading: the bid price, the prevailing market selling price of the currency pair, and the ask price, which is the price the market buys the same pair. The difference between the two prices represents the broker’s profit, which we call the spread.
But you may have heard about forex spread betting as well. Spread betting in forex is speculating whether the market price will rise or fall. When you engage in it, you don’t trade the underlying currencies but the market that tracks the price of a forex pair.
When you spread bet, you speculate based on the movement of the underlying currency. For example, if you believe the AUD/USD futures prices will rise before Sep 23, you would take a long position. If the prices did rise, your profit would depend on how much the market grew.
Leverage
You use leverage when trading forex with a spread betting or CFD trading account. Leverage means you only need to put up a portion of the entire trade value to open a position, known as margin trading.
Leverage allows you to take a larger position than you can afford. While it can increase profits, it also raises the risk of losses, as your exposure in the market is based on the position’s total trade value.
Trading Platforms
You need a trading platform provided by brokers to execute trades. These platforms offer various tools and features, including real-time charts, technical analysis indicators, and order execution options.
How it Works
In forex, currency pairs are often divided into major, minor, and exotic (or emerging) pairs. Your trades swap the strength of one currency against another.
The fundamental principle here is to understand that the market quotes all forex in terms of one currency versus another. As we’ve learnt, each currency pair has a ‘base’ and ‘quote’ currency.
If you foresee the “base” currency getting stronger than the “quote” currency, you will BUY that currency pair. Alternatively, if you believe the “quote” currency will weaken against the “base” currency, you would also SELL that currency pair.
When you take a long position and BUY, your profits rise with the currency pair’s value. But you incur a loss when the pair falls below your open level.
Examples
1. If you go long and ‘buy’ EUR/AUD, you speculate that the euro will increase relative to the Australian dollar.
2. Alternatively, if you go short and ‘sell’ USD/GBP, you speculate that the US dollar will weaken against the pound.
As a beginner, avoid the highly volatile currency pairs. Trade the majors as they are the most liquid and least volatile.
Note that the US dollar is the most widely used currency in the world, making up about 60% of all central bank foreign exchange reserves. Unsurprisingly, the US dollar is present in many of the ‘majors’ that account for 75% of all forex market trades.
Read about the Opportunities and Risks in Trading Emerging Market Currencies in our other article.
How to Start Forex Trading UK: Step-by-step Guide
With the understanding of the concept of forex trading UK, you are ready to engage the first gear. But take it easy; you are still learning the ropes. Here is the step-by-step guide to how to start forex trading.
Educate Yourself
Choose a Reputable Forex Broker
Open a Trading Account and fund it
Develop a Trading Plan
Start Trading and Monitor Your Performance
You may not know it, but when you started reading this article, you had already begun trading forex because the first step to do it is learning how we do it. Isn’t that what you are doing now? Before anything else, it’s crucial to educate yourself about the market, the key concepts and fundamental principles, and learn a few trading strategies and risk management tricks. You are already doing this, but you can expand your knowledge further by taking an online course, reading our other materials, reading beginner books, and researching other resources.
The next important step is picking a broker. You can’t trade forex directly. You need a reliable intermediary to facilitate your trades. In the UK, you look for brokers regulated by the Financial Conduct Authority (FCA). Such brokers offer more than a trading platform. They have excellent tools, adhere to strict regulatory standards and offer the best services.
After selecting a broker, open a trading account. But always check with your broker; not all offer the same types of accounts. They have varying accounts to meet various trading needs and capital requirements. Afterward, download the platform provided by your broker. Popular platforms such as MetaTrader 4 (MT4) and MetaTrader 5 (MT5) offer advanced charting tools, technical indicators, and automated trading options.
As a beginner, use the demo account to try forex trading with zero risk of losing money. Most brokers will provide you with 10,000 virtual funds to practice buying and selling in actual market conditions. But once you are comfortable, you can deposit funds into your account and trade forex for real money. Most brokers offer multiple funding options, including bank transfers, credit/debit cards, and e-wallets.
But before you begin trading for real money, have a trading plan. This plan outlines your trading goals, risk tolerance, and strategies. It is a blueprint that will guide your activities, ensuring you don’t get carried away, stay disciplined, and avoid impulsive decisions.
With your trading plan in place, start trading by analysing the market, identifying trading opportunities, and executing trades. Monitor your trades regularly and adjust your strategies as needed. Ensure you always have enough margin in your account and keep track of your overall risk exposure.
Get list of the best forex brokers in the UK in our other guide.
Forex Trading Risks in the UK
As with any investment or business, forex trading has risks, and beginners must identify, understand and learn how to manage them effectively. These risks include:
- Market Risk: Currency prices can be highly volatile, frequently changing values, leading to significant gains or losses. The prices respond to economic events, geopolitical developments, and market sentiments. So, always be on the lookout for the direction of the changes.
- Leverage Risk: Trading with high leverage only serves its purpose if you get it right and amplify your profits. But you risk losing more than your investment.
- Liquidity Risk: Some currency pairs may have lower liquidity as they are challenging to sell. The situation leads to wider spreads and increased slippage, which can affect the execution of your trades at desired prices.
- Broker Risk: Choosing an unregulated or unreliable broker can expose you to fraud, manipulation, and poor trading conditions. Always select a broker regulated by the FCA.
- Psychological Risk: Fear and greed can lead to impulsive trading. You must remain disciplined to stay on your trading plan.
As you start your journey in forex trading, it’s crucial to understand the impact of market volatility on investors mental health. Learn more about managing the psychological effects of trading to stay grounded in a fast-moving market.
Pros & Cons of Forex Trading
Forex trading offers exciting opportunities for traders, but it’s essential to approach it with caution, education, and a well-thought-out strategy.
Pros:
- High Liquidity: Forex trading allows you to trade different currency pairs, providing opportunities to profit from various economic conditions.
- 24/5 Market: The is open 24 hours a day, five days a week. You can trade at any time that suits your schedule.
- Leverage: Forex brokers offer leverage, enabling you to control larger positions with less capital.
Cons:
- High Risk: Like all trades, forex involves significant risk. But it gets worse when you use CFDs, which enables you to access more than your capital.
- Complexity: Understanding the forex market, analysing charts, and developing effective strategies require time and effort.
FAQs
Can I trade forex with £100?
Yes, you can. Many brokers allow you to deposit as little as £50. The greater the amount, the better; that gives you more freedom and flexibility in managing your risk.
How do you learn to trade forex for beginners?
Beginners can learn forex trading through online courses, tutorials, books, demo accounts, and by studying market analysis and trading strategies.
How does forex make you money?
Forex trading makes you money by profiting from the price differences. Buy low and sell high, or sell when the prices are high and repurchase it at a lower price.
Is forex trading suitable for beginners?
Yes. Forex trading can be a source of extra income, but beginners should educate themselves and practice with a demo account before getting in for real money.
Is forex trading like gambling?
No. Forex trading is not like gambling if done with proper analysis, risk management, and a strategic approach. However, trading without knowledge and strategy can resemble gambling.
Conclusion
Forex trading is exhilarating but sounds daunting for beginners. With a market driven by over £5 trillion daily, success hinges on knowledge, skill, and disciplined risk management. It is easy to get lost in pursuit of quick profits, so keep your guard up by committing to learning and honing your skills and strategies.
Are you ready to start trading forex? Start here by picking the right broker. You can also check our other pages for more information. We cover the basic principles of this trade, beginner strategies, and real-life forex examples. You’ll also find tips for success and step-by-step guides.
Related Articles: