Best Forex Brokers & FX Trading Platforms

What Is Forex trading?

Forex is the short name for ‘foreign exchange’. It is a market about trading money. It is about measuring one money against another every other foreign currency. Forex trading is one of the largest financial markets in the world. Companies move capital across borders all the time, as do travellers, foreign workers, and governments. Billions of forex trading occur every 24 hours. There is a genuine need to exchange currencies.

Forex trading came about after the demise of Bretton Woods monetary system in early seventies. Before that, major currencies were based on gold. Now, most currencies fluctuate in value over time. Some drastically so. This is a characteristic of the fiat (ie, paper) monetary system. Once in a while, a central bank can even impose control on the value of its currency. The Swiss National Bank, for example, capped the value of the Swiss Franc in 2011 when the currency surged uncontrollably.

How Does Forex Trading Work?

Forex trading works by buying one currency against another and speculating on the price difference between the two. FX trading operates in all time zones five days a week; in all key financial centres like Tokyo, Singapore, Zurich, Frankfurt, London, New York. One exchange closes, the other opens.

Foreign exchange movements are relative. It is one value versus another, like a ratio. Most forex is priced relative to the US Dollar because of America’s outsized influence on world economy affairs, ie, the number of local currencies per US Dollar. When a FX rate is quoted without USD, it is called a ‘cross rate‘.

Where Can You Trade Forex?

Forex is a 24-hour, 5-days a week market. Some brokers (like IG) even offer forex trading on the weekends. You can trade forex with CFDs futures, forwards, spread bets, or even exchange-traded funds (ETF). Because of this liquidity, there are forex trends that astute traders can exploit.

The best forex brokers are in the UK and are regulated by the FCA which means that they must adhere to a very strict set of rules when dealing with clients and marketing their services.  All advertising must be balanced and fair. You’ll see lots of advertising from large brokers that offer forex trading through CFDs & spread betting. You can compare them here:

• Compare Spread Betting Brokers
• Compare CFD Brokers

All of the above forex trading platforms only highlight their products – not how easy it is to make money. For whatever reasons you decide to trade Forex, “you pays your money, you takes your chance” – just make sure you use a regulated forex broker.

Is Forex Trading Profitable?

It can be. The connectivity of the internet has democratised forex trading.

The proliferation of advance trading software gives retail forex traders tools that only professionals had in the past. You can execute automatic trading strategies (algo) forex markets, where buying and selling orders can be set up automatically.

You can trade currencies both ways – buy and sell – easily and leverage is easily obtainable from brokers.

Hence, the forex market is well suited to tech-savvy, independent thinkers. Interestingly, returns from the forex market can be largely independent to that of the stock markets. This is because factors influencing forex returns are different to that of stocks or bonds. There are periods when exchange rates are trending while stocks prices are static. Multi-asset funds are thus eager for these returns from the forex market because it helps to lower overall volatility.

There are also forex strategies that exploit interest rate differential. Broadly speaking, you first borrow from currencies with lower interest rates and then buy currencies with higher interest rates. This is known as the ‘carry trade‘. During 2003-2006 it was popular to borrow in Japanese Yen and buy Pound Sterling because interest rates were low in Japan and high in the UK.

What Forex Pairs Should I Trade?

For beginners (or even intermediate) traders, you should focus on key forex pairs that are liquid. This is because liquid FX pairs generally have lower bid-ask spreads. Also, these forex pairs are floating (most of the time anyway) and are not controlled by the central banks. The top five forex denominations are:

1. USD-pairs
2. EUR-pairs (Euro was born on January 1, 1999)
3. GBP-pairs
4. JPY-pairs
5. CHF-pairs

This is followed by: CAD, AUD, SGD, CNY, MXN, among others. Countries with many commodity exports, such as Australia and Canada, are known as commodity currencies. The prices of commodities will impact their currencies to a certain degree.

You can read more on the most popular forex pairs for trading here.

Types Of Forex Orders

There are two main type of entry orders:

• Market orders ensure you are in the market quickly but your entry price may be subject to the prevailing conditions when you buy into it.
• Limit orders may give you better entry prices, but you may not execute the order. Prices may have simply run away.

Market orders are ones that you wish to enter straightaway (‘market’) or at certain levels (‘limit’) and there are advantages and disadvantages of each.

Risks Of Forex Trading

Trading forex is a risky activity. Harbour no doubts about this.

Leverage

The first risk is leverage. Many retail accounts lose over time because of the overly high leverage. Minute, random price movements decimate accounts equity quickly if traders are caught on the wrong side. Small losses can easily pile up and risk the account being terminated early.

Volatility

The second risk comes from sudden price moves.

For example, when the Swiss National Bank suddenly removed its cap in 2015 without prior warnings, it literally blew unrecoverable holes in many broker accounts because few traders expected the event. They were positioned in the wrong way – i.e., the cap stays – and the removal of the cap led to huge moves in the opposite direction. Brexit was another such event.

Volatile price moves can lead to a dry-up in liquidity. Traders will experience in a huge increase in bid-ask spreads during these volatile periods, especially when brokers themselves are under stress.

Top tip: Check the forex market opening times for peak liquidity to reduce volatility

Counter-Party Risk

The third risk comes from forex trading brokers. Choose your broker well. Inferior ones lead to higher spreads and commissions, which encroach returns and add transaction costs.

Occasionally, forex brokers can go bust, leaving customer accounts in limbo. It’s well worth checking if your broker is regulated  and if their customers funds are segregated. 

Another risk comes from inappropriate trading strategies for the market.

For example, trend-following strategies may be suited for some forex pairs; while reversionary strategies for better in other pairs. You will need to back-test strategies and conduct some dummy trading to ensure that the strategy you choose is viable for that particular forex market.

Other classic trading mistakes include:

• Overtrading the account,
• Undercapitalised funding,
• A lack of basic risk control,
• Inability to shift strategies over time

Alternatives To Trading Forex

Trading forex is hard and many new traders are lured into the world for currency speculation by social media influencers who are selling a lifestyle rather than any decent forex trading strategies.

If you’ve tried forex trading and not had much luck, here are a few alternatives that can help you scratch that trading itch, but come with the added benefit of being what I would call easier than betting on the price of currencies.

• Index trading – a bit easier because it’s based on the fundamental values of the companies it consists of. Also slightly less volatile.
• Commodities trading – pegged to a single commodity like Gold or Oil. Still good news flow, but very volatile
• Stock Trading – basically taking a bet on a single company – loads to choose from and with a huge amount of research available. The stocks in the top indices are the less volatile with the best liquidity.
• Fixed income investing for income – buying bonds and gilts to receive income from coupons – low risk and relatively low reward. Unless you buy junk bonds well below par in which case the risk and reward increase significantly.
• Dividend investing – buying shares with high dividend yields to receive income from the dividends. A bit riskier than bond investing, but there is capital upside (and downside) to consider.
• Options trading – you can trade options on almost anything. If you are buying you pay your premium and that is your max loss on the option (can be more if you are delivered on). If you are selling loses are unlimited so watch out.
• Cryptocurrency trading – the highest risk of trading as cryptocurrencies are about as volatile as they come with a price purely dependent on investor demand.