Forex Trading in the UK: The Ultimate Beginners’ Guide to FX [Foreign Exchange]

Last Updated on December 11, 2020

Forex Trading in the UK for Beginners – For UK investors, Forex trading can be a way to make wealth. This involves speculating on the rise and fall of currency fluctuations. It has become really popular in the United Kingdom with an estimated $ 2.88 trillion daily trading volume.

You may be drawn to forex trading because it offers the potential to make good profits in less time (minutes and hours instead of months) with your investment.

But is trading on the forex market really profitable for small individual investors? How much income can you earn by trading forex part time or full time? What are the risks?

There are so many other questions that may come to your mind if you are a beginner forex trader in the UK. We will try to answer all these and many more questions with this guide.

What Is Forex Trading

Forex Trading also FX (Foreign Exchange) is the buying and selling of currencies for the purpose of making a profit. Traders can place their transactions in the forex market, which is an over-the-counter market that allows investors to trade currencies. It is a platform for investors, institutions, banks and traders.

The foreign exchange market is the largest exchange market and achieves an average turnover of US $ 5,000 billion per day worldwide. It’s bigger than all the stock markets in the world combined. Trading activities are conducted through the “Interbank Market” which allows you to execute transactions 24 hours a day, 5 days a week from Monday to Friday.

In trading, there are various assets that people buy and sell to get paid. These assets range from currencies and shares to commodities and derivatives. In general, people can trade in whatever they own, be it real property or digital property.

Understanding Currency Pairs

All transactions in the forex market are based on the purchase of one currency for the sale of another currency. So you are trading or exchanging the 2 currencies simultaneously for one another, hence known as ‘currency pairs’.

For example: EUR/USD (Euro & the US Dollar), GBP /USD (Pounds Sterling & the US Dollar) etc. There are 100s of currency pairs, including the so called Majors, minors & exotic.

It is really important to understand what currency pairs, and how they work before you can start trading Forex. In this chapter, you will learn everything you need to know about Currency pairs. Let’s start!

Types of Currency Pairs

Currency pairs are mainly classified into 3 types:

1) Major Currency pairs: These are the currency pairs that include the British Pounds Sterling (GBP) as one of currency in the pair. Almost 85% of the global trading volume is traded in the majors.

Majors include 7 currency pairs: EUR/USD (Euro/US Dollar), GBP/USD (Pound/US Dollar), USD/JPY (US Dollar/Japanese Yen), AUD/USD (Australian Dollar/US Dollar), USD/CHF (US Dollar/Swiss Franc), NZD/USD (New Zealand Dollar/ US Dollar) and USD/CAD (US Dollar/Canadian Dollar).

Since most of the trading is done in majors, so they are highly liquid & it is easier to get in & out of trades. The opportunities to make profits are higher.

2) Minor Currency Pairs: Minors, also called the cross currency pairs, contain all the currencies in the major pairs except for US dollar. These include EUR (Euro), GBP (Pound), JPY (Japanese Yen) etc.

Examples: EUR/GBP, EUR/JPY, GBP/JPY etc. As you may have noticed that these are the crosses of all the major currencies excluding US Dollar. The liquidity & volume are lower than majors, so trading opportunities may be lower than with majors.

3) Exotic Currency Pairs: Exotic Currency Pairs are made from one of the currency from major pairs and other one from the emerging economies like: Brazil, South Africa, Mexico, Russia etc. Examples of such pairs include: USD/BRL (United States Dollar/Brazilian Real), USD/HKD (United States Dollar/Hong Kong Dollar), USD/ZAR (US Dollar/South African Rand), USD/RUB (US Dollar/Russian Ruble) etc.

Exotic Pairs usually don’t have high liquidity & trading volume but they have high volatility plus they have high spreads as compared to Major & Minor Pairs.

As a beginner Forex Trader, you need to stick to major pairs only as it offers high liquidity and predictable market movements.

Currency Pairs Lingo

When trading forex, you would come across these common terms. Here we will explain all the important terms.

1) Quote by the broker: When you open a trading account with a Forex Broker, they tell you the Bid/Ask price to buy & sell the currency. It will be quoted like this example: EUR/USD 1.2812/15. This price is the quote by the broker.

2) Pip: Pip is the smallest unit in the currency quote (given by the Broker). It is the last decimal in the price. For Example: In the quote 1.2811 moves to 1.2812, the movement in the last decimal is 1 pip.

3) Bid Price: Bid price is the price at which the broker is willing to buy a currency pair from you. At this price, you can sell base currency in the pair. This price is shown on the left side in the quote ticker by the Broker.

For Example: If you see the quote as EUR/USD 1.2812/15, then 1.2812 is the quote price, and it means that you can sell 1 Euro for 1.2812 US Dollars.

4) Ask Price: Ask price is the price, at which the broker is willing to sell a currency pair to you. At this price, you can buy the base currency mentioned in the pair. It is shown on the right side of the quote ticker by the Broker.

For Example: When you see the same quote as above it had 2 values in it: EUR/USD 1.2812/15, the second value tells you about the Ask price, it means you can buy 1 EUR for 1.2815 Dollars.

5) Spread: Spread is the difference between the Bid & Ask Price quoted to you by the broker. So in above example: in which quote is EUR/USD 1.2812/15, the difference between 1.2815 minus 1.2812 i.e. 0.0003 or 3 pips, is the spread.

How to Get Into Forex Trading In the UK for Beginners?

The first step is to start your own Forex education, which is widely used by successful traders – the acquisition of knowledge and skills. Knowing how foreign exchange markets work, how inflation and other political factors affect currencies, and how this affects trade can potentially help you make better decisions.

Brokers act as intermediaries between traders and liquidity providers. This facilitates the fulfillment of customer orders. You need to register with a Forex broker. There are many good and scam brokers. It is recommended to choose a licensed, regulated broker with at least 5 years of proven experience. If your broker complies with the regulations, you can be rest assured that they are legal.

Once you have an active account, you can trade but you will be required to make a deposit to cover the costs of your trades. This is called a margin account.

However, it is very important to remember that becoming a profitable trader is not an instant process. It takes time to become familiar with the markets, and you also need to learn new vocabulary. For this reason, reputable brokers offer a demo account. This is a great way to experiment with different trading strategies, but with virtual money and no risk!

Forex Trading Strategies

There are many different strategies that successful forex traders follow. But most of them fall into two categories: “Technical analysis” and “Fundamental analysis”.

Technical analysis involves looking at chart patterns, currency trends, etc. and then placing an order based on the chart patterns. While fundamental analysis is mainly related to trading based on information like GDP, job data etc. In this chapter, we will analyze only popular technical analysis strategies.

Technical Analysis

Most technical forex trading strategies involve some level of study and analysis of the currency chart or trends before making the actual trade. The good news is that almost all brokers all over the world now offer MetaTrader 4 or MetaTrader 5, which are great platforms for reliable technical analysis.

MetaTrader 4

MetaTrader 4, also known as MT4, provides access to a range of markets and hundreds of different financial instruments, including foreign exchange, commodities, CFDs and indices. It provides you with all the tools you need to both manage your trades and analyze the markets, whilst also being completely free to download.

With the MetaTrader 4 platform, you will enjoy easy-to-read, interactive charts that allow you to monitor and analyze the markets in real-time. You will also have access to more than 30 technical indicators which can help you to identify market trends and signals for entry and exit points.

MetaTrader 5

MetaTrader 5, or MT5, is the newest and most advanced online and free trading platform. Trading on MT5 via FXTM gives you even greater access to financial markets including foreign exchange, commodities, CFDs, stocks, futures and indices. Its diverse functionality, fundamental and technical analysis tools, copy trading and automated trading equip you with the best tools and instruments available.

Other great benefits of MT5 include a multi-threaded strategy tester, fund transfer between accounts and a system of alerts to keep up to date with all the latest market events. Traders can also communicate through the embedded MQL5 community chat to network with other traders and share tips and strategies.

It is recommended that you develop an understanding of the current market scenario and have a working strategy before placing an actual trade. Only depending on your strategy can you get the maximum profit in the future. Now let’s look into some of the most popular forex trading strategies.

1) Trend Trading or Support & Resistance trading

Trend trading involves identifying a trend, waiting for prices to pull back, and then following a continuation wave. This is one of the most profitable trading strategies and it is also a basic strategy for high performing traders. Let’s say the high of the EUR / USD pair over the past 3 months is 1.31 (making it a significant price point). We call the high the resistance.

Once the price crosses the previous high to reach a higher high, there is a huge chance that the old high will become a new low in a trending market. The low is now called the support.

Stick to the Majors: In the current scenario, there are seven major currency pairs which constitute almost 80% of the transactions. These major pairs include USD/EUR, USD/GBP, USD/JPY, USD/CHF, USD/AUD, USD/CAD, and USD/NZD.

If you are a new investor, it is a good strategy to begin trend trading with one of these pairs. This is because these pairs are very liquid and have stable volatility. Since these currencies are stable, they will help you in managing your risk initially. It is always a good strategy, to begin with, a USD pair because of stability. There are various other pairings available which do not include the USD.

2) Day Trading

Day trading is not a strategy in itself, rather it is a trading routine. In this strategy, you place your trades and close them in the same day or within a 24 hour window and book your profits (or losses).

You can make profits faster in this strategy, although the amounts may be lower. This is a very common strategy followed by a wide variety of small investors.

Another strategy is known as scalping. This strategy is based on opening a position for a short time and closing it to make a small profit. These strategies can be a great way to see profits quickly.

Best Forex Trading Platforms In the UK for Beginners

Forex trading in the United Kingdom (UK) is popular with residents. Before a forex broker can accept UK FX and CFD traders as clients, they must be approved by the Financial Conduct Authority (FCA), which is the UK’s financial regulator.

If you are ready to start trading Forex, you may be wondering which broker I should choose to trade online. To find the best forex brokers in the UK, we have compiled a list of all FCA authorized brokers and then ranked the brokers based on their trust score. Here is our list of the best UK forex brokers.

  • Saxo Bank – Best VIP client experience
  • IG – Best Overall Broker 2020
  • CMC Markets – Best web platform, most currency pairs
  • Swissquote – Best banking services
  • Plus500 – Best for beginners overall
  • Interactive Brokers – Best for professionals
  • – Great platforms and pricing
  • City Index – Excellent all around offering
  • FXCM – Well-rounded offering

How to Verify FCA Authorization

To determine if a forex broker is licensed to operate in the United Kingdom (UK), the first step is to identify the registration number in the disclosure text at the bottom of the UK broker’s home page. Then search for the company on the FCA website to make sure the registration number is indeed legitimate.

Pros of Forex Trading

  • Start with Low Capital: You can start trading in the forex market with as little as 10 USD or less as brokers these days have very low minimum deposits and very high leverage. But it is highly recommended that you start trading only with large capital and never risk more than 5% of your capital in a single trade.
  • Huge Trading Volume: Forex market is the largest market in the world with close to 5 Trillion USD daily trading volume. This makes it very liquid & you can easily place very large orders as well & close them without having to worry about price volatility because of your trade (unless there is some major event).
  • Buy/Sell: In forex, you can open take both short and long position to make a profit. If you feel that the particular currency is on the way up, you can buy it and go long. On the other hand, if you feel that a currency is not performing well, you can sell it and go short.
  • Open 24 hours: Another key benefit of forex trading is the ability to trade 24 hours, for five days in a week. These trading hours are much longer compared to traditional stock exchanges which allow you to place an order or close it during limited trading hours. In forex, you can place a trade & close it anytime during the week instead of waiting for the markets to open during the day.
  • Currency choices: Another major benefit is that forex trading allows you to trade in a wide range of currencies from around the world. This includes the traditional major currencies such as EUR and USD as well as exotic ones such as CZK and MXN.

Cons of Forex Trading

There are certain risks attached with forex trading, which you need to be aware of.

  • High Risk with Leverage: Forex brokers offer very high leverage, as high as 1:1000 in many cases. This means that you can place $1000 worth of trade in the market with just $1. Using very high leverage puts your trading capital at huge risk of depleting very fast with even a single bad trade. Ex: Let’s say that you deposit $100 in your trading account, and you use 1:1000 leverage to place a 1 standard lot buy trade on EUR/USD. In this example, you can lose your full capital if the price goes just 10 pips against you. We advise you to use proper risk management & never risk more that 5% of your trading account’s balance on a single trade.
  • Avoid Bad Brokers: There are so many forex brokers out there that lack transparency & are not even regulated. You should definitely avoid brokers that promote get rich quick schemes. Be wise enough to choose a broker that is regulated by Government bodies like FCA, CySec etc, has years of experience, must have good reviews & is transparent in their dealing of any issues.
  • Risk of Volatility: There are a wide range of factors which can influence the value of currencies (causing extreme volatile, especially for the non-conventional currency pairs), not limited to political or macro & micro economic factors. And unfortunately, you cannot control these factors. So it is really important to watch out for any news before placing or closing a trade & have strict stop loss limits in place to control any losses in case of bad event.
  • Emotional Stress: Forex trading can be extremely challenging emotionally. One bad trade can lead to big losses, and dealing with losses can be very difficult. It can cause you emotional stress.

How to manage these risks? Make sure you have a fully tested trading strategy (on demo) and use good risk management to be successful in Forex trading.

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