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Invest in Forex
A beginners’ guide to investing in forex, along with up-to-date exchange rates and the latest news.
If you’re totally new to investing in forex, this page serves as a beginner-friendly guide containing everything you need to know. And for those who already know how to invest in forex, there are links to in-depth guides, educational courses, and market analysis.
Ways to invest in forex
To trade forex the first thing you need to do is register with an online broker. These platforms allow users to exchange and trade a wide variety of currencies using CFDs, so you can make trades quickly as prices fluctuate.
Before making your first forex investment, however, it is important to understand how forex investing works and the best strategies to pursue. The links below each take you to useful guides, reviews, and other resources to help you improve your knowledge and your chances of success when trading foreign currencies.
A beginners’ guide to investing in forex
What is forex?
Forex is an abbreviation of ‘foreign exchange.’ When trading forex, you’re trading two currencies against each other in the hope of profiting as the exchange rate between them changes. Currencies are the most commonly traded asset on earth, and many people’s first experience of investing is trading forex.
To give a simple example of how it works, imagine £1 is currently worth $1.40 and you believe it will soon be worth less than that. At this price you could change £100 into $140. If the GBP/USD exchange rate were then to fall so that £1 was only worth $1.32, you could buy £106.06 for your dollars – a profit of £6.06.
This is how forex investments work on a basic level, with trades being made using currency pairs (e.g. GBP/USD in the example above). The first currency in one of these pairs is the ‘base’ currency, and represents the asset being bought; the second is the ‘quote’ and represents the currency being sold.
When you see the price or exchange value of a currency pair, it is simply displaying the number of units of a quote currency that can buy 1 unit of the base currency. For instance, EUR/GBP = 0.86073 means that one Euro can buy 0.86073 Great British Pounds – making a Euro worth just over 86p.
How do I make an investment?
By far the most common way of investing in forex is to use a broker to make short term trades, but it is also possible to buy and hold foreign currencies as an asset in the long term. We’ll take you through each approach and how to decide which is right for you.
Trading (short term)
When trading, your aim is to buy and sell currencies quickly in order to make money from short term price fluctuations. Changes in the value of currencies are measured in tiny increments known as ‘pips.’ One pip is an increase or decrease of the last decimal of a price quote; for instance if the EUR/USD currency pair goes from 1.19232 to 1.19233, it has gone up one pip.
Forex traders look to capitalise on small price changes such as this, with the aim being to make frequent trades and be right more often than you’re wrong. Here are the key things to do when trading forex:
- Get to grips with the basics of technical analysis. Forex trading relies on being able to read and analyse price charts quickly and effectively. This is known as technical analysis, and your success when trading currencies will depend on how well you have mastered this.
- Learn key terms such as pip and lot. Pips (described above) measure the extent that a currency pair has changed in value, whereas a ‘lot’ defines the volume of trading activity. A standard lot represents $100,000 worth of a currency being traded, and it’s also possible to divide this further into mini-lots (1/10th of a lot), or micro-lots (1/100th of a lot). It’s important not to get lost in jargon, but it’s also necessary to know terms like this so you can understand information as it comes across.
- React quickly to events. Foreign exchange markets are highly reactive to global political events, so you need to be aware of what is going on in the country or countries that use the currency you’re trading. For instance, as the results of the Brexit referendum became clear in June 2016, the pound (GBP) briefly fell by more than 10% against the dollar (USD).
- Focus on mitigating risk. Instead of looking for instant big wins, forex trading is about gradually accumulating profits by maximising your gains and minimising losses. You need to have a strategy to ensure that when you’re right you turn £100 into £110, but when you’re wrong your £110 only drops to £108.
- Keep calm and focussed. Currencies are the most commonly traded asset in the world, and as such prices are constantly in flux. Unless you keep a cool head it’s easy to lose sight of larger trends or to risk too much money after a string of successful forex investments. A trader’s biggest challenge is controlling their emotions and acting rationally at all times.
- Look for the right trading platform. There are a huge number of forex brokers to choose from, and so you should always compare your options before registering with a foreign currency trading platform. Most brokers will offer comprehensive forex CFD trading options, but will vary in terms of fees and commissions, spreads, and the number of currencies available to trade. Our reviews can help you make the right choice for your first forex investment.
The most important thing to remember is to stick to your strategy so that you can achieve success over a long period of time. While your aim is to profit from short term price changes, you want to achieve this consistently so you keep making rather than losing money.
One thing not to do, however, is focus too much on how a currency performs after you have sold it. For instance, if you invest £200 in Euros and sell after the EUR/GBP currency pair has risen by 2%, then you’ve made a successful trade with a profit of £4. Whether the price then rises further is not your concern – you made money and want to focus on the next trade.
Investing (long term)
The less common approach to investing in forex is to buy currencies for the long term. With this approach, the aim is to exchange money into a currency you think will perform well over the upcoming years, generating a profit as the currency’s value rises.
Long term forex investing is generally better suited to people with higher budgets (it makes more sense to do with £1,000s rather than £100s), and requires you either to open a bank account or use an online platform that allows you to hold many currencies at a time. Here’s what you need to think about when investing in this way.
- Look at long term trends. Your aim is to change your money into a currency that will rise in value, so consider which countries look set for future growth. Forex prices are usually strongly linked to politics and the amount of trade being done using a particular currency, so stable countries with emerging economies tend to perform well.
- Work out how long you want to invest for. If you’re changing money into a currency other than the one used in your country, then it will be tied up as an investment for a certain period of time and you’ll be unable to use it for other things. Consider how long you’re happy to set the money aside before you change it back into your native currency.
- Prepare for volatility. Forex markets are constantly fluctuating, and you want to be aware of this and hold your nerve through small price changes. You’re making an investment for the long term, so you need to keep a cool head and look at the bigger picture.
- Be ready to change your approach. Not everything is ‘just a small amount of volatility’ and sometimes events happen that require you to change your approach. If a currency’s value starts falling for substantive reasons (such as political instability in the country that manages it), then you’ll want to change your money into another currency.
- Choose a reliable bank or currency exchange. You need to find a foreign currency exchange, bank, or multi-currency account that allows you to buy large amounts of currency at a good exchange rate. Make sure you don’t sign up with a broker that only supports CFD trading, as this is a short term approach that means you never actually own the underlying currencies you are trading.
To achieve success when investing in forex, you need to have a good grasp on global trends so you can work out which currencies are going to perform well as time goes on.
It is more complex than investing in other assets such as stocks, as the factors that impact the value of currencies are very wide-ranging – from the results of elections to the introduction of new laws impacting tariffs on goods and services. However, you can generate solid returns by moving your money between different currencies if you can anticipate which way the markets will shift in the long term.
What is best for me?
The answer to this question will depend on your own circumstances and goals. To help guide your choice, here is a checklist of what to think about.
- Learn how forex trading works. You should never invest in something you don’t understand, and therefore learning how currency pairs work and how currencies can be traded against each other to make a profit is essential. Currencies can be bought and sold directly, or traded using CFDs, and it’s important to know the difference between these approaches.
- Figure out how much you want to invest. The resources you have available are a good indicator of the approach you should take. If you have a couple of hundred pounds to play with, then it’s best to try your hand at forex trading and gradually build your money as the market fluctuates. If you have more money and want to spend less time focussing on your trades, you might consider making long term forex investments.
- Decide the level of risk you’re comfortable with. Buying and holding forex for the long term generally comes with less risk than trading – but also with reduced potential reward. This is because prominent currencies tend not to increase or decrease hugely in value overnight, so you can always adjust your position if market trends change. Short term trading focusses on minute-by-minute fluctuations, however, which can see larger rises and falls in price – particularly just after big announcements such as governmental budgets or international trade agreements.
- Consider your timeframe. Traders look to make money fast – often opening and closing trades in the space of just a day. Investors on the other hand look more to long term growth and think more in terms of how much they will make over the next few years. If your aim is to make an extra £200, you’ll want to learn how to trade; if you’re saving for the future, long term investing is the way to go.
- Select your ideal platform. Depending on how you want to invest, your requirements for a broker will change. If you want to buy and hold for the long term you need a platform that supports these transactions, and if your plan is to trade then you’ll want a broker with low fees and that supports CFD trading. Additionally, you might want to invest using ETFs or other financial instruments; if so you should look for trading platforms that support these options.
- Start investing gradually. Whatever your approach, if you’re new to forex then you should always start small. If you’ve got £1,000 to invest, then start by trading with just £200 of it. That way you can learn from your mistakes and keep adding more over time as you have more experience in the markets.
It’s important to bear in mind that these two approaches aren’t mutually exclusive and the best way to invest in forex can include part of each: you can invest some of your money for the long term and also set aside some to use to place regular trades.
For both approaches you’ll want to keep on top of the latest forex trading news and create a strategy that allows you to manage your forex investments with a cool head. Keep reading to find out more about these approaches, and the different currency pairs available.
What to invest in, and ways to invest
Forex investments can take many shapes. You can buy and sell currencies directly, use financial instruments such as CFDs to speculate on price movements, or diversify your investments using ETFs or mutual funds that give exposure to different currencies.
To help you understand your options, we’ll guide you through the different currency pairs you can trade and invest in, and then summarise how they can be bought, sold, and traded.
What should I invest in?
In general, the currency pairs available to trade fall into three categories: major, minor, and exotic pairs. Here’s a quick summary of each and what to consider when choosing how to invest.
- Major currency pairs. These are the most prominent and widely-traded currency pairs in the world. These change over time, and currently the most traded pair is EUR/USD, with other major pairs being USD/JPY, GBP/USD, and USD/CHF. All major pairs include USD as this is the world’s reserve currency.
- Minor currency pairs. Minor pairs are those that do not include USD as part of their pairing. Also known as cross-currency pairs, prominent pairs in this category are EUR/GBP, NZD/JPY, and EUR/AUD.
- Exotic currency pairs. If a pair is made up of a large global currency and the currency of a developing nation, then it’s known as an exotic currency pair. Examples of these pairs include USD/HKD, GBP/ZAR, and EUR/TRY.
The most major difference you will see between trading these different currency pairs is in the ‘spreads’ available. If you don’t know what a spread is, don’t worry it’s explained below – but typically, major pairs have the lowest spreads and exotic pairs the highest. This is because of the differing amounts of trades being placed and the subsequent liquidity of the market.
In forex trading, the spread is the difference between the bid (buy) and ask (sell) price of each currency. Think of it like a bureau de change at an airport: they make money by selling you some Euros at a much higher price than they’ll buy them back off you. With online brokers the difference between these amounts is smaller, but there is always a ‘spread’ between the two prices and this is how they charge a commission.
Ways to invest
The first thing you need to know is abou the three different methods you can use to place trades, and the second is the different platforms and financial products you can actually use to invest your money.
The three different types of forex trades are defined by when the trades are completed. Here’s a summary of each.
- Spot trading. A spot trade is a trade that is executed immediately at the current market rate. If the EUR/USD price is currently 1.18943, then you could make a spot trade and immediately exchange $1.18943 for one Euro.
- Forward options. With a forward option you set a price at which you can buy a currency in the future, but are not obligated to complete the trade. If you believe the EUR/USD price will rise in the next week from 1.18943 to over 1.91, you could take out a forward option allowing you to buy Euros at a rate of 1.91 in a week’s time. If the price does move higher, you can buy EUR at below the market rate, and if it doesn’t you can just choose not to make the trade.
- Futures trading. Futures contracts are like forward options, except that they do come with the obligation to complete the transaction. With futures trading you agree to buy a certain amount of currency for a set price on a specified date. If we consider the example given above in relation to forward options, you have to buy Euros at 1.91 even if the price had only risen as high as 1.90.
Both forward options and futures contracts require you to pay premiums for their duration, so be careful to factor these into the cost of any of your trades.
Now that we’ve covered the different forex trading methods, here are the different options you have to invest.
- Currency exchange services. If you simply want to buy and hold foreign currencies for a long period of time, then you’ll want to use a service that allows you to buy currencies and either hold them in your account or transfer them to a compatible bank account.
- CFD trading brokers. For forex traders, the best option is to use CFD brokers. These platforms allow you to trade forex without owning the underlying currencies – allowing you to take long and short positions and execute trades quickly as the market fluctuates.
- ETFs. An increasingly popular form of forex investing, ETFs (Exchange-Traded Funds) can hold a range of currencies at the same time. For instance, if you believe that Asian economies are going to perform well in the near future, you can buy an Asian currency ETF which gives you exposure to many different currencies in the region.
- Robo-advisors. A robo-advisor is a service that uses technology to invest your money for you, helping you save for the future. You can set up a robo-advisor account to give you exposure to international forex markets and invest passively in currencies.
- Mutual funds. Mutual funds are a way of investing that involves many people pooling their money together and trusting it to a fund manager. The fund manager then invests the sum of money and tried to benefit all the people who have invested in the fund. If you want to invest this way, you can find mutual funds that focus on forex.
- PAMM Accounts. Similar to mutual funds, PAMM accounts involve allowing a professional trader (or many professional traders) to place trades on your behalf. PAMM stands for “Percent Allocation Management Module” and this sums up how they work: you choose a percentage of your investment that is managed by different people.
- Foreign bond funds. You can take out bonds in other countries that are denominated in that nation’s currency. For instance if you buy a Spanish government bond, the eventual payout with interest will be in Euros.
You can follow the links at the top of this page and start trading today. Alternatively, if you want more information then keep scrolling for the latest forex news and analysis from our experts, or you can check out our forex courses to improve your knowledge.
Make sure you’re always up-to-date with the latest forex news. Find the most recent articles from our team right here.
Read our expert analysis of the forex markets to help spot investment opportunities. Covering all currency pairs and emerging trends, our coverage will help you cut through the noise.
Forex prices and data
Get up-to-the-second price data for all tradeable currency pairs right here.
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If you want to improve your knowledge and forex investing skills, then take one of our free courses today. These beginner-friendly, step-by-step guides take you through every aspect of trading forex.