What Is Forex Trading And How Does It Work?
The exchange of currencies on a globally accessed forex market is called forex trading. It is one of the most rewarding investment opportunities of all time. Most importantly, you can get started with forex trading for as low as $50.
The forex market is known to have higher liquidity levels as compared to other types of investment. The price of currencies fluctuates owing to different social and geopolitical factors. The varying prices enable traders to generate some good profits with margin-based trading. With that being said, let me give you a quick example to help you understand how forex trading works.
Suppose you enter a trade to sell GBP against USD. The exchange rate of GBPUSD is 1.36 at the time of exchange. You place an order to buy 10,000 USD. Let’s forget about the spread, for a moment. You buy 10,000 US Dollars for 7353 GBP. After a week, you realize that the exchange rate of GBP/USD has fallen to 1.30. You immediately sell the previously purchased 10,000 USD at the current market price. Doing so brings you a profit of 7353-7692 (10,000/1.36)= 339 GBP.
In the above example, you can see that buying 10,000 USD requires you to pay 7353 GBP while selling them back against the GBP, brings you 339 GBP in excess of what you paid earlier. That’s because the price of the US Dollar rose against the GBP in one week.
It is important to mention here that in real trading, the transaction will also have spread/commission charges. However, it may not be more than a few bucks.
Pros And Cons of Forex Trading
Forex trading, without any doubt, has massive potential to yield some good profits in a very short period. However, it also sometimes causes losses beyond your expectations thanks to high volatility and unforeseen financial/economic events. Let’s discuss some main pros and cons of forex trading briefly;
- Flexible Trading Conditions – The forex market remains open five days a week. Traders carry on trading activities on a part-time basis at a time of their convenience.
- Controlled Decisions – Traders have complete authority and control over their trading decisions. They can enter long or short positions based on their trading analysis. Trading decisions, in forex trading, cannot be interrupted or affected by a third-party intervention.
- Availability of Demo Accounts – Demo accounts are a real blessing for newbie forex traders. They can gauge their trading skills before making any investments in the financial markets. Experienced traders can also benefit from demo accounts by practicing new trading strategies.
- Low Costs – Compared to other investment opportunities, the cost of forex trading is considerably lower. You don’t have to spend capital expenditures on infrastructure or manpower. You can start forex trading with any investment amount, even as low as $50.
- Leverage – Leverage or margin-based trading is one of the most important benefits of forex trading. Traders can have increased market exposure using leverage. Generally, you can avail of up to 1:30 leverage at regulated brokers while unregulated brokers offer up to 1:2000 leverage. The use of high leverage can however be extremely risky and may cause loss of part or all your investment.
- Highly Liquid – The forex market has high liquidity available almost all the time. All orders are filled/executed in real-time without any wait or hassle.
- Involvement of brokers / third-party institutions – Retail traders cannot access the forex market without a broker or third-party institution such as Liquidity Provider (LP). This limitation comes with its own merits and demerits. While a broker provides some great advantages such as leverage, trading platform, etc. at the same time it also costs some extra bucks in terms of spread/commission. Some brokers are even involved in dishonest practices such as manipulation of orders, stop loss hunting, etc.
- Risk Factor – Forex trading is riskier as compared to other investment opportunities. It is almost impossible to take all financial and economic events into account while entering a position. Some unexpected events such as terrorist activity, natural disasters, political happenings, and wars can result in a crash-like market situation anytime.
- Social Trading Limitation – Social trading is an effective way to make some passive income. Still, there is a risk that you might end up following the wrong trader who eventually leads you to incur some major losses in trading.
How To Start Trading Forex in the UK
Forex trading is a very popular and tax-free business in the UK. The country is known to be an epicenter of forex traders as well as forex institutions. According to a report published by the Bank of England in 2019, daily forex trading volume in the UK is more than $2,881 Billion. The country has a strict regulatory framework in place. Regulated forex brokers in the UK are governed by the rules and regulations of the Financial Conduct Authority (FCA).
Getting started with Forex trading in the UK is straightforward. You need a live trading account with any broker, some funds in it and you are ready to go live in the forex market.
Read: Best Forex Brokers in UK
Forex brokers in the UK have to comply with strict Anti Money Laundering (AML) guidelines. The AML guidelines require all traders to provide proof of identity as well as proof of residence before making any investments. You can submit a scan copy of your passport or ID card as a proof of identity while a scan copy of your bank statement or utility bill as a proof of residence.
Once your account is verified by the broker, you can deposit funds and kick off your trading journey. Forex brokers in the UK offer multiple payment methods to deposit and withdraw funds. The most common payment methods include credit cards, debit cards, bank wire, Skrill, Neteller, Webmoney and PayPal.
Forex Trading Communities, Forums, and Discussion Groups in the UK
Social connections can be an effective way to improve your trading knowledge and skill. Besides learning different trading ideas from other traders, you may also start thinking from different dimensions. There are many forex trading discussion forums and groups available for UK-based forex traders. Top three of them are listed below:
#1) Forex Factory
Forex factory tops my list of the best online forex trading discussion forums. The forum contains threads on a diverse range of topics related to forex trading. Some of the main categories of discussion include forex education, news, trading strategies, indicators & EAs and reviews of forex brokers.
#2) Babypips Forum
Babypips is another well-known forex trading forum for UK-based traders. It offers a comprehensive range of forex related educational articles, glossary, news updates and discussions
Whether you need information on the UK stock market or you want to get updates on future price movement in the pound sterling, Trade2Win is a platform you might want to visit.
Forex Infuencers to Follow in the UK
#1 Learn to Trade Blog
When it comes to following top forex influencers in the UK, you have many choices available online. One such influencer is a popular blog that is owned and managed by a professional trader Greg Secker. His trading analysis on currencies and CFDs is very helpful.
#2 Jarratt Davis – A forex influencer
With a fan following of more than 20.7K on Facebook and over 7K Twitter followers, Jarratt Davis is a famous forex influencer in the UK. People love to listen to his trading ideas and follow his suggested trading strategies.
#3Samuel Kavanagh (Sam KB)
Samuel Kavanagh is a trading professional and co-founder of a trading company called KB Trading Consultants Ltd, registered in the United Kingdom. He is one of the most popular forex influencers based in the UK, and is widely followed for his daily trading analysis on the forex market. With over 20,000 subscribers, his youtube channel hits nearly 20K views every week. You can also follow him on Facebook for community group access.
Is forex trading legal in the UK?
Yes, forex trading is legal in the UK. However, there are strict rules in place that govern the forex trading business in the country.
What is the best time to trade forex in the UK?
The best time to trade forex in the UK starts as soon as the London Session opens at 8 am (UK Standard Time). During this time, high volatility can be noticed in both FTSE100 as well as pound sterling.
Is Forex Trading taxable in the UK?
No, forex trading is a tax-free business as long as it is carried out as spread betting. Spread betting is an act of speculation on the price of assets, expecting them to rise or fall. Also, there should be no personal profits coming from forex trading that can be termed as capital gains, because capital gains are taxable in the UK.
Can you make money trading Forex in the UK?
Yes, forex trading is an extremely profitable business if carried out skillfully and professionally. You just have to be patient and consistent in your trading strategy. Emotional and impatient traders don’t have any future in forex trading business.