Forward Diary

How to Trade Forex

Most of us are familiar with foreign exchange trading, even if we don’t know it. Buying euros, dollars or whatever at a currency exchange before we go on an overseas holiday, and changing what’s left back into pounds when we return, amounts to trading foreign exchange. It’s a small part of a huge global market and one that is followed enthusiastically by many successful traders. Currencies are always traded in pairs, for example GBP/USD, with the first in the pair referred to as the ‘base’ currency. In this case the UK pound is the base currency against the US dollar. We have already mentioned that currency – otherwise known as forex or FX - can be traded using spread bets or CFDs. The currency markets are unusual in that there is no centralised place of dealing. Instead, FX is an ‘over-the- counter’ market, with trading conducted via the internet and telephone networks that connect the world’s major financial centres. The fact that these networks span every time zone means that from Monday to Friday the FX market is open and accessible 24 hours a day. Each trading day begins in Sydney then continues to move as the sun comes up around the globe, from Tokyo to London to New York. While it is sometimes referred to as the forex ‘spot market’, contrary to what this might suggest FX is not part of the futures and options market, although forex futures are derived from it. Forex trades are measured in ‘points’ or ‘pips’ – for instance, with USD, one pip is one-thousandth of a dollar.  A pip is the smallest unit of price that a currency can be traded in, while a ‘tick’ is the minimum change in the price of a currency, whether it is up or down.   This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions