How to trade forex

You can read more about how to trade forex while watching this video, or refer to the text below if something in the video remains unclear.

You trade currencies in pairs

All currencies are traded in pairs and each currency has an official abbreviation, for example GBP for British pound, USD for US dollar and EUR for the euro.

The “base currency” is the first currency in the pair and the “quote currency” is the second currency. These are commonly referred to as the bid and ask price.

Price differences create trading opportunities

You can trade currencies because the values of currencies change. The exchange rate tells you how much of one currency you need to pay to buy one unit of another. In forex trading, exchange rates are displayed as the bid and ask price for a currency pair.

The difference between the bid and the ask price is known as the spread and it's how your broker generates much of its revenue. Spreads can vary from broker to broker, so look out for tight spreads in order to minimise your trading costs and maximise your profits.

Know what’s behind the spread

It’s important for you to understand how spreads are measured. For example, if GBPUSD has a bid price of 1.5530 and an ask price of 1.5533, the spread is three points. Although in forex trading, most people call them pips.

A point or pip is the smallest movement up or down in the price of a currency.

You can trade in bullish and bearish markets

When you trade forex, you’re buying one currency and selling another at the same time which means you can speculate on rising and falling markets. This is one of the major advantages of forex trading.

You are likely to hear forex traders talk about bullish and bearish markets. When a market is rising or believed to be about to rise we call it “bullish”; when it’s falling or believed to be about to fall it’s called “bearish”.

How you can place your first trade

First of all, consider whether the currency you wish to trade is likely to rise or fall. This forms the basis of your trading strategy.

In a buy position, you believe that the value of the base currency, in our example the euro, will rise against the quote currency, the US dollar.

Let’s assume the price of the EURUSD is 1.3038 on the bid price and 1.3040 on the ask price. Therefore, the spread is two pips. When you buy, your trade is entered at the ask price of 1.3040.

Later you decide to close your trade and the bid price of the EURUSD pair is 1.3072 and the ask price is 1.3074. Your trade has gained 32 pips. If each pip was worth one US dollar, you would have made a USD32 profit.

Now let's see what happens with a sell position. You believe that the value of the base currency will fall against the quote currency. Using the same example, this means you believe the price of the euro will weaken against the US dollar.

The current value of the EURUSD pair is 1.3038 on the bid price and 1.3040 on the ask price. As you’re selling, your trade is entered at the bid price of 1.3038.

Later in the day, you look at the position and the EURUSD is now at 1.3072 on the bid price and 1.3074 on the ask price. Your trade has lost 36 pips. You decide to close your position at the current price of 1.3074 and accept your losses. If each pip was worth USD1, you would have lost USD36.

Find out more about related topics by visiting our other videos and fact sheets.