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Forex trading | Evening Standard

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oreign exchange trading, often abbreviated to ‘forex’ or ‘FX’ trading, involves the buying and selling of currencies.

If you’ve ever exchanged pounds for euros or US dollars at a bureau de change, bank or Post Office, you’ll have carried out a minor forex trade of your own.

The overall forex market is worth a fortune and, traditionally, has been the preserve of major financial organizations and the ultra-wealthy. But thanks to the market of technology, forex has started to attract the attention of private investors.

Here’s a look at how forex works and the main points for would-be traders to bear in mind.

What is forex trading?

In a nutshell, forex trading concerns the speculative buying and selling of currencies in a quest for profit. It’s also used to ‘hedge’ existing currency bets against a background of exchange rate fluctuations. Hedging is a way to protect a financial position from the risk of making a loss.

Converting, say, a few hundred pounds of our own cash for holiday spending purposes might not seem like a big deal. But looking at the bigger picture, forex is not just the largest market in the world, it’s also the one that’s most actively traded.

The numbers are mind-boggling. According to the latest, triennial, figure from the Bank for International Settlements, global forex trading amounted to around $6.6 trillion daily in 2019. That equates to more than double the UK’s annual gross domestic product or GDP figure, a measure of the country’s entire goods and services.

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Market never sleeps

Individual stock exchanges, such as the ones located in London and New York, trade at specific opening and closing hours.

Forex, in contrast, is an around-the-clock market with four main trading hubs spanning different time zones: London, New York, Tokyo and Sydney. When trading stops in one time-zone, it begins in another. Forex is also traded in Paris, Frankfurt, Zurich, Singapore and Hong Kong.

Unlike the holidaymaker who might need foreign notes and coins to pay for a taxi ride from the airport, forex traders aren’t looking to take physical delivery of currencies.

Most dealing takes place between institutional traders who work on behalf of wealthy individuals, financial organizations and multinational companies.

Before the advance of communications technology, only institutions and those with the necessary finances were able to play the forex market. But times have changed which means that private investors now make up a small part of the trading landscape.

Note: whether forex trading is right for you depends on a number of factors, including your financial circumstances, market knowledge and appetite for risk. As with any market-based trades, there is always the potential for investors to lose money as a result of their decisions. Because of the way the forex market works, the potential for losses can be considerable (see below).

Why is forex traded?

For several reasons, for example, to hedge against international currency and interest rate risk. This is topical at the moment, as the world comes out of the pandemic and economies tussle with the headwinds of inflation combined with considerable pressure on the need for interest rate rises.

Forex is also used to speculate on the impact of geo-political events – such as the heightened tensions between Russia and the West over its invasion of Ukraine. Political outcomes and natural disasters have the potential to significantly change the strength of a country’s currency, all leading to potential trading gains or losses.

Companies also make use of forex. Large organizations with multiple overseas locations, for example, might rely on forex to hedge currency risk resulting from transactions carried out by their subsidiaries around the world.


Forex can also be used as a means of diversification within an investment portfolio. Because the forex market is open globally 24 hours a day, five trading days a week, it provides investors with the chance to react quicker to news whose impact on a particular stock market might otherwise be delayed.

Economic indicators used to analyze the forex market include:

  • interest rates
  • inflation rate
  • a country’s economic policies/balance of payments
  • a government’s attitude towards intervention in currency markets.

Forex trading takes place ‘over the counter’, which means there’s no physical exchange of the underlying currency. Instead, a global network of banks and other financial institutions effectively oversee the market.

Thanks to advances in technology, the evolution of smartphones and an array of online trading platforms, it’s possible for individuals to trade currencies via their mobiles and tablets.

How does forex work?

The main challenge with forex trading is to predict if the value of one currency will increase or decrease relative to another.

A trader who thinks a currency’s value will increase might buy it with the aim of selling it on at a profit. This is known as ‘going long’. Alternatively, on the basis a currency could decrease in value tomorrow, a trader could sell today with a view to buying it back subsequently at a cheaper rate. This is known as ‘going short’.

How currencies are traded

Similar to the stock market ticker symbols that are used to identify particular companies – Next plc is NXT, for example – each global currency has a three-letter code. For example, the most-traded currency worldwide is the US dollar represented by USD.

The second most popular currency is the euro (EUR), followed by the Japanese yen (JPY), British pound (GBP), the Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF) and the New Zealand dollar (NZD).

In all, there are more than 170 currencies worldwide.

In forex, currencies are always traded as ‘currency pairs’. This because when you buy one currency, you simultaneously sell the other. The following currency pairs are known as the ‘majors’ and make up about three-quarters of all forex trading:


‘Minors’ represent all the other combinations of the world’s biggest currencies, for example GBP/EUR.

Each currency pair is made up of two elements. The first is the ‘base currency’. When listed in a trading quote, this part is always equal to 1. The second part is the ‘quote currency’.

As an example, consider the currency pair GBP/EUR = 1.20. The base currency is the pound sterling and the quote currency is in euros. The pairing means that £1 is worth €1.20 if you decide to buy. Put another way, this means it would cost €1.20 to buy £1.

When you buy a currency pair, the price you pay is called the ‘ask’ and when you sell it’s called the ‘bid’.

Ways to trade

There are three main ways to trade forex at scale:

  • spot market. The main forex market where currency pairs are swapped and exchange rates are evaluated in real-time, based on supply and demand.
  • forward market. Where forex traders enter into binding contracts with each other, locking into a particular exchange rate for an agreed amount of currency at a future date.
  • futures market. In contrast to the spot/forward markets, this is where traders take out a standard contract via a futures exchange to buy or sell a pre-agreed amount of currency at a specific exchange rate on a date in the future.


  • Currency pair. In addition to majors and minors, exotics involve pairs that involve less-traded currencies, such as the Mexican peso (MXN).
  • Bid ask spread. The difference between the buying price and selling price of a currency pair. The spread is measured in ‘pips’.
  • Pips. A pip in forex is usually a one-digit movement in the fourth decimal place of a currency pair. So if GBP/EUR moves from €1.19461 to €1.19561 it has moved by a single pip. A price movement at the fifth decimal place is known as a ‘pipette’.
  • An exception to the pip rule is when the Japanese yen is the quote currency. In this scenario, a pip is calculated as a one-digit move in the second number after the decimal point. If USD/JPY moves from 110.06 to 110.09 this is a three-pip move.
  • leverage. Another term for borrowing money. It enables traders to participate in the forex market for larger amounts of money than they themselves may be willing, or able, to put up.
  • Margin. This is the deposit needed to use leverage within forex trades.

Lots of meanings

‘Lot’ is another piece of forex jargon. Even a 50-pip move won’t earn a forex trader very much if he/she is working in 100 or 500 units of currency. That’s why most traders buy and sell currencies in ‘lots’ – batches of currencies that enable them to take advantage of relatively small price moves.

A standard lot is equivalent to trading 100,000 units of currency. Buying one lot of EUR/USD means buying 100,000 euros for their value in US dollars.

This is where traders use leverage (see above) to avoid having to tie up all their capital in a single trading position. With leverage, you only have to put up a fraction, or margin, of your position’s full value to open a trade.

Leveraged trading is risky, however, because losses can be magnified until they exceed the initial amount borrowed. Lots also come in micro (1,000) and mini (10,000) batches.

How do I trade?

Forex brokers run a number of online trading platforms as well as several apps.

Do your research before signing up to a service. Read broker reviews online, for example, and make sure your provider is regulated by the Financial Conduct Authority, the UK’s financial watchdog.

Funds should be held in a segregated account so that, should your broker go bust or cease trading, your money is safe. Swerve services that refer to ‘risk-free’ investing or make offers that sound too good to be true.

Before opening an account and launching yourself into trading, ask what sort of trades you want to do and find out how much it’s going to cost with the platform/app of your choice. Remember that the more obscure the currency pair, the wider the spread will be in order to execute a trade.

Read the fine print and don’t be fazed by special signing-on offers or benefits. Check first if they come with restrictions, or if there are strings attached.

Some platforms feature user forums enabling you to speak to other traders. Alternatively, if you’re a rookie forex trader, look for providers that offer online tutorials, or ones that provide customers with the opportunity to practice trades first with ‘virtual’ money via demonstration accounts.

Set to automatic

As the FX market is one that never sleeps (except at the weekend), 24-hour customer support from your provider may prove useful. Some services allow you automatically to open and close positions once certain levels of trading have been reached, ensuring your account is not subject to an unforeseen trading surprise.

To be a proficient forex trader, it’s essential to research your chosen currencies. For example, you’ll need to know in advance the dates when countries make public their key economic announcements such as GDP figures, balance of payments, inflation rates and so on.

Equity markets, interest rate announcements and important news developments all have a role to play in a currency’s strength or weakness as well.

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