How do I trade forex?
As a retail forex trader, there are three main ways to trade forex:
- Spot forex (most common)
- CFD (not available in the US)
- Spread bet (UK only)
At FOREX.com, all our forex markets are spot forex.
What is spot forex?
Also known as cash forex or retail forex, spot forex is where you use a retail forex provider like us to go in and trade in the over-the-counter market on your behalf.
We are literally going into the market, finding the best prices, and fulfilling your desired currency trade for you.
Three things you should know about spot forex
Spot forex is a leveraged trading contract
It is important to remember that you are not actually trading the currency itself. Rather you are trading a contract to deliver the currency (note that this contract is not a CFD).
And because it’s leveraged, you don’t have to stump up the full deposit for the trade. But as previously stated, leverage is a double-edged sword that can either magnify your profits or your losses.
You are not going to receive the currency you are trading
When you buy GBP/JPY, you are not going to take delivery of any Japanese yen. Similarly, if you trade EUR/USD, you will not receive any US dollars. This is because as previously stated, you are trading a contract to deliver the currency, not the currency itself.
When you close your trade, any profit or loss is realised in the currency of your account.
You can either earn or incur rollover payments
There is technically a delivery date for you to receive the currency, but it is always ‘rolled over’ onto the next day.
When you hold a position overnight, you are either charged or credited with a rollover fee (also known as a financing charge). These fees fluctuate daily and are different for long and short positions.
You can find the rollover fee for you market in the ‘Financing Charges’ section of our platform.
A rollover fee is calculated using a swap rate.
The swap rate is measured by the difference in interest rates between the two currencies. We source the swap rate from major financial institutions which base it on a variety of factors such as inflation and key technical indicators.
How to place a forex trade
A step-by-step guide on how to trade EUR/USD.
Step 1
You research the forex markets. You see on the news that the European Central Bank has reported strong economic growth and will increase interest rates. You also notice that the US economy has not performed as well as expected recently.
This leads you to believe that the euro will rise against the dollar.
You decide to buy EUR/USD.
Step 2
To place your trade:
- Log into the FOREX.com web platform
- Select the ‘Browse Markets’ tab
- Choose ‘EUR/USD’
Already you can see the ‘SELL’ and ‘BUY’ buttons in the top right of the screen. Selecting either of these will open the deal ticket and enable you to choose how much you want to trade.
Step 3
But first, we will select ‘Market 360’. This will give you all the information about the market – from charting tools and news in one convenient place.
It will also give you easy access to details such as the financing charges which we will come back to later.
Step 4
To buy EUR/USD, select the green ‘Buy’ button. This will open the deal ticket.
In the quantity section, you enter how many US dollars you want to buy.
You enter 10,000 USD.
$10,000 USD! This isn’t a small amount of money.
Remember, spot FX trades use leverage. This means you don’t have to put up the full value of the trade. In this example it is only 58.82 USD.
The 58.82 USD is known as your margin and is dynamically shown at the bottom of your deal ticket when you open an amount.
- In the quantity bar, enter ‘10,000’
- Select ‘Place Trade’
Congratulations. You bought 1000 USD at a rate of 1.17666
Step 5
Your intuition proves correct. A day later the euro rises 10 pips to 1.17766.
A pip is the smallest amount a forex pair can move. It is the fourth figure after the decimal point e.g. 1.17666
For example, if EUR/USD rose from 1.17666 to 1.17676, this would be an increase of 1 pip.
The fifth figure after the decimal point is a fractional pip. A fractional pip is just one tenth of a pip.
You decide it’s time to close your trade and take your profit.
- Log into the FOREX.com web platform
- Select the ‘Default Workspace’ tab
- Choose ‘Close’ in the ‘Positions’ subtab
Step 6
This will launch the deal ticket.
As you can see, the deal ticket shows that if you close the trade at 1.17676, you will make a profit of $11.
To close your trade, simply select ‘Close Position’.
Alternative scenario
However, no trader gets it right every time. The EUR/USD could’ve dropped 10 pips to 1.17566.
In this instance, you would have made a loss of $10.
Rollover payments
Earlier, we talked about rollovers payments. And because you held the trade overnight, you incurred a small fee.
In the ‘Financing Charges’ section, the financing charge for your long EUR/USD position is listed as -0.52USD.
Therefore, you were charged 52 cents for holding the trade overnight.
- Pick the market 'EUR/USD'
- Select the 'Market 360' tab
- Choose 'Financing Charges'
There’s more forex to learn in our Trading Academy