A Guide to Forex Trading

The term forex stands for foreign exchange and a so forex trader is therefore someone who buys or sells currencies with the hope of making a profit on these transactions.

For a novice trader looking to try out forex spread betting it is probably best to select a company like FinancialSpreads or IG Index which offers a free demo account. A demo account is an account with virtual funds and therefore comes with zero-risk. As such demo accounts can help an investor to get to know the ins and outs of the forex market.

You may also want to learn how to interpret charts and technical indicators. It is sometimes best to start with familiarising yourself with one type of chart, e.g. candlesticks, instead of jumping from one to the other and back again.

It may also pay to familiarise yourself with the different indicators available as these are widely used by a range of traders when trying to analyse market trends. Market indicators are split across two broad categories of analysis; technical analysis indicators and fundamental analysis indicators.

Technical analysis indicators are built using past price patterns whilst fundamental indicators encompass any relevant economic data such as company earnings or GDP growth.

There are no commission fees when spread betting on the forex markets, rather the commission is included in the spread. Once logged on to the trading platform, you will see two prices; if you are speculating on the market to go up, then the higher price is the price you pay when you enter a trade and the lower one is the price you get when you close the trade. This difference in prices is called the spread.

It is therefore important to note that even if you open a trade and immediately close it there is still a cost involved. This is where less experienced traders can go wrong, i.e. by making a large number of small trades and therefore accumulating trading costs.

With the popular ‘spread betting rolling day’ trades you will also be charged a small fee if you rollover any long (buy) trades from one day to the next. Note that if you rollover a short (sell) trade then your account may receive a small credit.

If you have traded shares though a broker before, you will be familiar with buying shares and selling them again, hopefully at a profit. This way you can of course only make money if the price of your chosen share goes up.

With forex spread trading you can also profit from a falling market, this is called ‘short’ trading. The fact that you can make money whether the price goes up or down does not mean you will make a profit when you are wrong, you still have to correctly predict whether the price will go up or down.

Forex trading is often leveraged, e.g. ‘forex spread betting’, ‘forex CFDs’ and ‘margined forex’. With a leveraged trade you only have to deposit a fraction of what you are actually trading with, often as low as 1%. Your profits will therefore literally be multiplied by 100. Unfortunately this is also true if you are wrong: your losses will also be multiplied by 100.

A way to protect yourself against large losses is by applying Guaranteed Stop Loss orders to your trade.

Financial spread betting is a leveraged investment option, it involves a high degree of risk to your capital and can result in losses that exceed your investment. Please ensure that it matches your trading objectives as it might not be appropriate for all investors.

Make sure that you only spread bet with money you can afford to lose. Before you start trading, make sure that you fully appreciate the risks that are involved and obtain independent financial advice if required.

A leading financial author based in the heart of London’s Canary Wharf. Thomas Bainbridge is a respected commentator on the financial markets including the financial spread betting markets

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