What Currencies Should I Trade?
There is no single answer for which currencies you should trade since this will depend on the market, your skill level, and your preferences. Some suggest trading just a single currency pair, while others recommend trading multiple pairs. If you choose to trade a single pair, you will become more familiar with it, theoretically increasing the chances of profits. If you opt for several pairs, on the other hand, you are exposed to more opportunities and a gain from one pair can compensate for a loss from another.
Those who are just starting to trade forex should typically start with just one pair, and the most commonly suggested one is EUR/USD. Since these are the two biggest currencies in the world, they have a high liquidity and a low spread. Other commonly suggested pairs for beginners include USD/JPY, GBP/USD, USD/CAD, and AUD/USD since they focus on large markets and are easily found on most forex exchanges. Once you gain more experience, however, you can expand your reach and will find that most currencies can be traded. It tends to be easiest and bring in the most profits if you opt for the biggest currencies because of the liquidity and the wealth of information available.
What Is the Amount of Money I Should Start Trading With?
How much money you will need to start trading forex depends on your goals and the type of trades you plan to do, such as day trading or swing trading. You should not have a problem finding a forex account with a minimum opening balance of £100, although most will have that minimum set to several hundred pounds. That said, many traders face the problem of undercapitalization. Essentially, you can only make a large amount of money trading forex if you have a lot to invest in.
Because of the riskiness associated with trading forex compared to other assets, many experts suggest that you never risk more than three per cent of your capital for a single trade. Assuming you only start trading with £100, this means the maximum you should risk in a trade is about £3, but that also means you would not make more of a profit than this. You can indeed make a steady profit, and it is a smart idea for beginners to limit their trading quantities until they get a better feel for forex. Most traders do not want to put in the effort needed to research and trade forex pairs just to make a few pounds. This is why it is more common to invest at least several thousand pounds.
Should I Open an Account at More Forex Brokers?
There are both advantages and disadvantages to opening accounts with more than one forex broker, which is why many people do so. If you still trade small amounts, you should be fine sticking with just a single account from one broker. Once you begin trading greater quantities or have more money invested in forex, however, it can be wise to open another account.
There is always a risk that a broker will go out of business. In this case, you will likely have some level of protection from the UK’s Financial Conduct Authority, but receiving that reimbursement may take some time.
In the meantime, you would be able to continue trading with the funds in your account with another forex broker. Additionally, you will have minimal concern if your account with one broker is temporarily frozen while “under investigation” or for another reason since you would still be able to trade via the other broker. Additionally, advanced forex traders will sometimes use multiple trading strategies and find having several accounts to be a clear way to keep the strategies separated and avoid confusion. Separate accounts can also make it easier to compare the various strategies you use to see which one works best.
Should I Use Leverage?
Leverage is one of the unique aspects of forex trading that attracts many traders. It is, however, possible to trade forex without any leverage. Leverage can be highly appealing, though, since it allows you to trade greater quantities than the amount you have in your account, increasing your profits. The problem arises from the fact that leverage can also lead to greater losses, including those in excess of your balance. So, while it increases the potential rewards, it also increases the potential risks.
If you are still a beginner and unfamiliar with forex trading, then it is best to either avoid leverage or keep to smaller amounts since this will reduce your risk of losing all your funds. Once you have experience, however, you should strongly consider using leverage on the trades that you are confident in. Just remember to do plenty of research on a forex trade beforehand due to the potential losses.
There are also some strategies you can use to select the ideal leverage level for your particular trades. When using leverage, it is best to stick to a lower level unless you are extremely confident and can afford to lose the leveraged funds. You should also limit your capital to one or two per cent of all trading capital for each position you take and use trailing stops to protect your capital.
The Difference Between Fixed and Floating Spreads
As you look at the spreads for forex trading, you will notice that they can be either fixed or floating, with the latter also known as variable spreads. Remember that a spread is the difference between the lowest price that a trade feels willing to sell a currency pair and the highest price they are willing to pay. Essentially, a spread is how much it costs to trade that pair. As the name implies, a fixed spread will not change, always maintaining its value as the currency pair’s value fluctuates. Floating or variable spreads, unsurprisingly, do shift. The spread can fluctuate based on supply, demand, and the total trading activity.
If you notice a broker promoting their tight spreads, this will typically be variable, meaning it is not always as good as it first appears.
Both fixed and floating spreads have their own advantages. Fixed spreads can deliver more transparency, can lower the cost of trading, make it easier to trade in volatile market conditions via their ability to control against volatility, and tend to work better for short-term strategies. By contrast, floating spreads will occasionally offer better deals, but the timing must be right. Typically, a floating spread will be lower than a fixed one in normal market conditions, making them ideal for long- to medium-term investors. Beginners should generally keep to fixed spreads due to their predictability, while experienced traders will have a personal preference.
What Spread Should I Expect
As a reminder, the spread is similar to how much it will cost you to trade a currency pair, marking the difference between asking and bidding prices for a trade. Most forex brokers make their profits via spreads instead of commissions. The thing to remember about a spread is that it will be multiplied across the full amount traded. This means that even a small difference in the spread can lead to a large variation in the amount you pay or receive, depending on the transaction volume.
For major trading pairs, you should expect the spreads to be somewhere between one and two. Unless you choose a broker with fixed spreads, you will have to remember that the spread varies based on factors like volatility, available liquidity, supply, and demand. If you want to get the best possible spread, trade during favourable hours as this is when brokers tend to lower spreads to maintain a competitive edge during this period. You should also stay with currencies that are traded more often, like GBP/USD instead of thinly traded pairs for a similar reason. There is more competition, so markets makers will compete for business, leading to better spreads.
What Is Equity?
As the simplest definition, equity is the amount of money in your trading account. It becomes a bit more complicated than this, however, since the average forex trader will have open positions within the market. When this happens, your equity at a given moment changes based on the unrealized loss or profit accrued by the positions. Those losses and profits are factored into the equity once you close all the positions, at which point the equity is the same as the account balance, assuming no positions are open.
When calculating equity of a forex account, the mathematics will include the account balance minus unrealized losses or plus unrealized profits. This is important since it is common for an unrealized loss to occur on a trade before a profit occurs, although that is not always the case. Margin and leverage also play a role in equity, with the margin for any leveraged trade essentially set to the side as collateral. You can also think of your equity in terms of the margin currently used on trades plus the free margin, with the latter being affected by unrealized profits and losses.
What Is Buy and Sell?
For those new to forex trading, the idea of buying and selling can seem foreign as currencies are not physical commodities. However, the process of trading forex is just buying and selling a given currency pair at the proper time. Every pair fluctuates based on the stronger currency at a given moment and its exchange rate. Major currency pairs are those that include USD, including EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. There are also crosses traded that involve GBP, EUR, and JPY, which are the most actively traded, plus exotic pairs and other types of pairs.
To better understand buying and selling currency pairs, look at EUR/USD. You would buy this pair if you think the US economy will weaken as that hurts the US dollar. Essentially, buying EUR/USD is purchasing Euros based on your assumption that it will increase compared to the US dollar. If, however, you feel that the opposite is true, you would sell EUR/USD. Whichever currency comes first in the pair is the basis for your buy sell and known as the base currency. It takes familiarity with the markets to know the ideal times to buy and sell currency pairs
How Can I Deposit Money?
The specific way that you can deposit money into a forex account will depend on the broker that you choose to use. Most, however, will offer a range of options. Assuming you select a broker based in the United Kingdom, you should be able to deposit funds in British pounds, but some international brokers may restrict deposits to USD or EUR. This is an important thing to check as your bank will likely charge a conversion fee for you to deposit funds in one of these currencies.
It is typically possible to deposit money in a forex account via a wire transfer, using a credit card, or even writing a check. Depending on the broker, the last may not be an option. You will also need to pay attention to deposit limits and fees to confirm that there are not any. Most brokers will not charge a fee for deposits, but there may still be a credit card fee that the credit card company charges them, and they pass onto you. Before choosing your deposit method, you should also see how long the deposit will take. If your chosen broker accepts paper checks, expect to have to wait at least several business days for your funds to be available for trading.
Can I Get an Overview of My Old Transactions?
No matter the forex broker you choose to work with, you should be able to easily find an overview of your old transactions. All brokers will provide monthly statements, with most being digital by default. Depending on the broker, you may also be able to request a paper statement that lists the transactions for that month, although this may come with a fee. Alternatively, you could print out the digital statements you receive. These are the same options you would have with any other type of broker or a traditional bank with your chequing account.
You should also be able to log into your account and go to a page that shows your earlier transactions. The specific location of it will vary based on the broker, but look for labels such as “Transactions” or “History.” These will likely be somewhere on your account page. You should be able to find an overview of past transactions with ease regardless of your forex broker. If you cannot find it, they should have instructions for finding it within their own FAQ section. While you will be able to always find a list of past transactions, the broker may only keep this information for a set period, such as five or ten years. There also will likely not be any overarching calculations, other than perhaps totals for a given month.
What Does the Pip for the Currency Yen Round at the Second Decimal?
Pips are the unit used to measure the movement of currency and for most currency pairs, it is the fourth decimal place. You will also see fractional pip pricing from most forex brokers, which means you might see five decimal points. When you look, however, you will notice that the pips only go to two decimal places, so most forex brokers will only typically display up to three decimal places for a fractional pip. This is simply a convention used in forex and something you should expect.
To calculate the pip for a USD/JPY, EUR/JPY, or another pair with Japanese Yen, you can just divide 1/100 by the exchange rate. By contrast, to find the pip value for most other currencies, you would divide 1/10,000 by the exchange rate, since those pips go to four decimal places. Pips are important for calculating profits and losses. If someone buys USD/JPY at 112.06 but it is at 112.09 when closed, this is a loss of 3 pips, since pips are in the second decimal place. If the trade closed at 112.02, this would be a profit of 4 pips. The difference in pips is small but the profit or loss is multiplied by the pips (in their decimal formats). As such, small variations can dramatically impact the amount made or lost in the case of high-value trades, particularly those with high leverage.