What Is Forex Trading?
Forex trading — short for foreign exchange trading — is the act of buying one currency while selling another. Currencies are always traded in pairs. For example, if you trade GBP/USD, you are buying British pounds and selling US dollars (or vice versa).
The forex market operates 24 hours a day, five days a week, across global financial centres including London, New York, Tokyo, and Sydney. London alone accounts for roughly 38% of all global FX turnover.
How Do Currency Pairs Work?
Every forex trade involves two currencies. The first is called the base currency and the second is the quote currency. If GBP/USD is quoted at 1.2650, it means one pound buys 1.2650 US dollars.
Major, Minor, and Exotic Pairs
Major pairs always include the US dollar: EUR/USD, GBP/USD, USD/JPY. These have the tightest spreads and highest liquidity.
Minor pairs do not include the dollar: EUR/GBP, GBP/JPY. They are less liquid but still widely traded.
Exotic pairs include a major currency and a developing economy currency: USD/TRY, GBP/ZAR. These carry wider spreads and higher risk.
Understanding Pips and Spreads
A pip (percentage in point) is the smallest standard price movement in a currency pair — typically the fourth decimal place. If GBP/USD moves from 1.2650 to 1.2651, that is a one-pip movement.
The spread is the difference between the buy (ask) price and the sell (bid) price. This is effectively the cost of the trade. Tighter spreads mean lower costs.
What Is Leverage in Forex?
Leverage allows you to control a large position with a relatively small deposit (called margin). For example, with 30:1 leverage, a £1,000 deposit controls a £30,000 position.
The FCA caps leverage for retail traders at 30:1 for major pairs and 20:1 for minor pairs. This is because leverage amplifies both profits and losses equally.
Warning: A 3.3% adverse move with 30:1 leverage would wipe out your entire deposit. This is why the FCA requires brokers to state what percentage of their retail clients lose money.
How to Start Forex Trading in the UK
1. Learn the fundamentals. Understand how pairs work, what drives currency movements (interest rates, economic data, geopolitics), and how to read charts.
2. Choose an FCA-regulated broker. Verify on the FCA register at register.fca.org.uk. Look for competitive spreads, reliable execution, and negative balance protection.
3. Start with a demo account. Most brokers offer free practice accounts with virtual money. Use these to test strategies without risking real capital.
4. Start small. When you move to live trading, begin with minimal position sizes. Never risk more than 1-2% of your account on a single trade.
Risks of Forex Trading
Forex trading is not suitable for everyone. The FCA notes that between 69% and 82% of retail investor accounts lose money when trading CFDs and forex.
Key risks include leverage risk, market gap risk (prices jumping overnight), and counterparty risk. Currency markets can also be affected by unexpected political events, central bank decisions, and economic data releases.
Risk Disclosure: Trading and investing carries significant risk. Your investments can fall as well as rise. CFDs carry high risk of rapid loss due to leverage. This is information only, not financial advice. Seek independent advice before investing.
Frequently Asked Questions
Can you make money from forex trading?
Some traders do profit from forex, but the majority of retail traders lose money. The FCA requires brokers to disclose their client loss rates. Success requires significant education, discipline, and risk management.
How much do I need to start forex trading?
Most UK brokers allow you to open an account with £100-£500. However, starting with a small account and high leverage increases the risk of rapid losses. A demo account is recommended first.
Is forex trading regulated in the UK?
Yes. Retail forex brokers must be authorised by the FCA. This provides protections including negative balance protection, leverage caps, and segregated client funds.
What is the best time to trade forex?
The London session (8am-4pm GMT) offers the highest liquidity for GBP pairs. The overlap between London and New York sessions (1pm-4pm GMT) typically sees the highest trading volume.
Is forex trading the same as CFD trading?
Most retail forex trading in the UK is conducted through CFDs (Contracts for Difference). You do not own the underlying currency — you speculate on price movements. This means CFD risk warnings apply.
What moves currency prices?
Interest rate decisions by central banks, inflation data, employment figures, GDP growth, political stability, and global trade flows all influence currency prices. Unexpected events can cause sharp, sudden moves.
