The Bank of International Settlements (BIS) reports the U.K. is the world’s No. 1 forex trading hub, accounting for over 43% of global activity in the market. Its Triennial Central Bank Survey puts the volume of spot trades in the total market at $2 trillion per day.
In short, people around the world are finding their way into the forex market, and the U.K. is taking full advantage of it. Here is your short introduction to the basics of forex trading in the U.K.
Get Started with Forex in the UK
Trading forex is easier than ever. If you want to get connected to the largest, most liquid financial market in the world, follow these steps:
- Connect to the internet. You can trade forex using your preferred device, from multiple screens to your smartphone. Sophisticated trading requires taking in a great deal of information at once, so it’s usually better to trade on a desktop. Your system should have an up-to-date OS with minimal latency for fast trade execution.
- Choose your online forex broker. You have so many choices in a forex broker. Before you decide, test the platform using virtual accounts (accounts that trade with fake money). Keep in mind that you may want more than 1 platform for more than 1 kind of trading.
- Open your forex account. Once you choose your platform(s), follow the process to open your account. Opening an account will set you up with money transfer options to and from your bank and verify your identity.
- Fund your account. When you are ready to trade with real money, transfer it in from your bank account. The leverage your account receives depends on the amount of money you deposit. Margin also depends on where your chosen broker is located. Most brokers allow deposits from checks, debit cards or bank accounts.
- Download your trading platform. Your chosen broker either connects you to a trading platform or provides its own proprietary platform. Trades should be easy to make and facilitate error-free input. Don’t commit to a platform that seems to argue with your fingers.
- Trade. Take your time here — don’t overtrade. Use the virtual account first to acclimate yourself to the platform and study forex trading strategies to improve your odds of success.
UK Forex Trading Strategies
There’s plenty of money flowing through the U.K. forex market, but successful trading is more likely with a proven strategy. Take a look at some of the ways that people trade forex.
Momentum indicators are very popular because they indicate the possibility of a trend. Crossover lines on a momentum indicator provide entry and exit guidance. Momentum is considered a lagging indicator. You’ll enter a trade after a trend begins, but there is less chance of being wrong about the trend.
Attribution: Forex Training Group
When a price breaks away from a previous range, moving past the extremes of that range, it’s a breakout. Investors who move on this pattern hope that the price will continue to move in the breakout direction because it has broken the resistance of the previous range.
Return to Mean Strategy
If you notice a currency pair is trading in a range around a certain price, you may employ a return to mean strategy to pull a profit from your investment. When the product moves away from the mean, you make a trade that assumes it will return to that mean at some point.
Retracement: Even during a strong trend, prices hardly ever move up or down in a straight line. At some point in a rally, investors will take profits. The stock will experience a retracement, also known as a pullback. Retracement investors look to make money from the pullback rather than the rally.
If you think that a price is rising or falling on fake news or people are overreacting to something, you may invest in a reversal. Reversal traders want to be ahead of the market and they make use of momentum indicators and technical cues like double tops or the head and shoulders pattern.
A carry trade is a trade augment, meaning that it usually isn’t a primary strategy. If you hold a trade overnight, you can take advantage of the interbank interest rate of the currency you purchased. Also, if you buy a high-interest currency with a low interest one, you pocket the difference.
Attribution: About Currency
You can trade off of the highs, lows and price reversals during the day if you’re good at determining support and resistance levels in a trading range. These pivot points are important points where people expect price action to change. As a result, those price points often become self-fulfilling prophecies.
Forex Trading Example in the UK
Let’s say EUR/GBP is trading at 0.85060/0.85080 and you think the price will rise. The margin rate of this currency pair is 3.23% and you want to purchase €10,000. You will only need £274.78 in your account.
Keep in mind that it is possible to lose more than £274.78 because you are leveraging with margin (borrowed money from your forex broker).
The EUR/GBP price does actually move up. In 2 hours, it’s trading at 0.86130/0.85150. This is a move of 105 points, and your profit is (€10,000*0.86130)-(€10,000*0.85080), or £105.
Making Money with Forex in the UK
Picking the correct direction of a trade is the first way most people learn to make money in forex, but it’s not the only way. Here are some other winning trades you can also take advantage of:
- Shorting currency pairs: Instead of buying a currency pair at a low price and selling it at a higher price later, shorting involves selling a currency pair first and buying it back at a lower price later.
- Contract for differences (CFDs): CFDs track the price of forex currency pairs. When you trade CFDs, you never actually own any currency. They are traded with margin, which offers leverage for investors without the cash to cover a full trading position.
- Binary options: These all-or-nothing options allow investors to speculate on the future price of a currency pair. They are called fixed-return options because the amount of money you gain or lose is fixed, not tracked to the movement of the currency pair.
Best Online Forex Brokers in the UK
The broker you choose will likely have an impact on your execution and trading style. Have a close look at this list of forex brokers.
If you want to research forex on your own or converse with other U.K. investors about strategy, you should know these basic terms.
- Pip: The standard unit of the forex market, representative of the smallest allowable change in a currency price — usually U.S. $0.0001.
- Lot size: A unit of currency — the standard lot size in forex trading is 100,000 units.
- Orders: The strategy you use to enter or exit a trade in forex.
- Calls: A currency derivative contract — buying a call option gives the buyer the right to buy a currency pair on or before a certain date at a certain strike price.
Money in its Rawest Form
The world of forex is exciting and can be dangerous for an untrained investor. This is literally the market that is moving money around the world. It’s quite easy to get started but hard to master.
It’s quite easy to get started and it’s even easier to lose money. Take the time to learn the trade before you trade.
Bookmark this page for updates and be sure to check back with our blog for the latest tips about how to trade the forex market.
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