The advent of widespread internet connections has made it easier than ever before to engage in small-scale international forex trading. Forex trading used to be a highly specialized profession carried out by a selected few, but today pretty much anyone with an interest in forex trading and some money to risk can sign-up for a forex trading account with an online broker site and start trading. The transaction costs can be kept low and you can make a nice profit even with a small start-up capital.
Modern forex trading platforms online tend to come with a lot of tools that the trader can utilize, as well as guides, news services, and more. Statistical aids, analyzing programs and automatic trading are just a few examples of tools that can come in handy for the forex trader. Find tools and more guides about trading and finance on these websites:
Trading
The basic foundation of forex trading is the trading of currency pairs. The currency codes used are normally the standard ISO 4217 currency codes.
Data from the year 2015 shows that all four of the most traded currency pairs on the fx market involves USD as one of the currencies.
EUR/USD
USD/JPY
GBP/USD
USD/CHF
(Translation: USD = United States Dollar, EUR = Euro, JPY = Japanese Yen, GBP = British Pound Sterling, CHF = Swiss Franc)
The first currency in a currency pair is the base currency. So, in the currency pair EUR/USD it is the Euro that is the base currency while the United States Dollar is the counter currency.
If you for instance see the quotation EUR/USD 1.2566 it means that 1.00 Euro is traded for 1.2566 United States Dollars.
Another example: USD/CHF 1.0009
In this example, the United States Dollar is the base currency and the Swiss franc is the counter currency. 1.00 USD is traded for 1.0009 CHF.
About currency exchange
As soon as two populations with different currencies come in contact with each other and wish to engage in some type of trade, a need for currency exchange normally arises. In the olden days, it was common for coins to be maid out of precious materials, so that the trader from a foreign land only had to convince the traders to trust in the value of the material (e.g. silver, gold or copper). They didn’t have to worry about the quality of the issuer. Even so, professional currency traders have existed for thousands of years, making it easier for people with different currencies to conduct business with each other.
Today, we have a very different situation, where currency is largely something that exists digitally and a forex trader isn’t sitting on a pile of gold, silver and seashells from various parts of the world.
The forex market is decentralized, with several larger and medium sized electronic brokering platforms functioning as hubs. Two of the most important ones are Thomson Reuters Dealing and the Electronic Broking Services (owned by ICAP plc). Both are part of the interbank market, the top-level foreign exchange market where banks exchange currencies.
Different Types of Forex Instruments
A variety of financial instruments are available for traders seeking to gain exposure to currency movements. Each instrument serves a different purpose, catering to various trading styles, risk appetites, and investment goals. Understanding the different forex instruments can help traders choose the most suitable approach to the market. The ideal choice of forex instrument will depend on a variety of factors, including the trader’s experience level, risk tolerance, and trading objectives. It should also be noted that some forex trading strategies involves more than one forex instrument, e.g. due to hedging.
When it comes to forex trading, spot trading and Contracts for Difference (CFDs) are the most popular choices for retail traders looking for liquidity and quick execution, while futures and options provide structured alternatives for hedging and speculation. For those seeking indirect exposure to currency markets, exchange-traded funds (ETFs) offer flexible investment opportunities. By understanding the different forex instruments and their unique characteristics, traders can make informed decisions that align with their trading strategy and financial goals.
Spot Forex
The spot forex market is the most straightforward way to trade currencies. In a spot transaction, currencies are bought or sold at the current market price, with settlement typically occurring within two business days. This type of trading is highly liquid, making it the preferred choice for retail traders and institutions looking for quick execution. Spot forex trading allows traders to profit from short-term price movements. When positions are leveraged, even small market fluctuations can yield significant returns on a small trading capital. (Leverage, however, will amplify both profits and losses, and your account balance can get wiped out very quickly if the market goes against you.)
Contracts for Difference (CFDs)
Forex CFDs allow traders to speculate on currency price movements without actually owning the underlying asset. The CFD is thus a type of derivative. Your broker will be your counterpart in the trade, so you are not trading against other traders.
You will enter into an agreement with your broker to settle the difference between the opening and closing price of a trade. CFDs provide flexibility, leverage, and the ability to go long or short with ease.
CFDs are often heavily leveraged and this comes with its own set of risks.
Since your broker is also your counterpart in your trade, there will always be a conflict of interest. Serious brokers can handle this, but there are also shady brokers out there that will manipulate the price information on the trading platform to boost their own profitability. As always, it is important to pick a reputable broker regulated by a serious financial authority with strong trader protection.
Forex Forwards
Forwards are contracts where two parties agree to exchange currencies at a predetermined rate on a future date. Unlike spot forex, forwards are not traded on centralized exchanges but are customized contracts negotiated over-the-counter (OTC). These are commonly used by businesses and financial institutions to hedge against currency fluctuations. For example, an exporter might use a forward contract to lock in a favourable exchange rate for a future transaction, protecting themselves from unfavourable market movements. While forwards offer flexibility, they require significant capital and are less accessible to individual traders.
Forex Futures
Forex futures are standardized contracts traded on regulated exchanges, where traders agree to buy or sell a currency pair at a fixed price on a set future date. Unlike forwards, which are private agreements, futures contracts are publicly traded and subject to regulatory oversight, ensuring transparency. Traders use forex futures for speculation and hedging purposes, as they allow for leverage and provide a structured way to bet on currency movements. One advantage of futures is that they eliminate counterparty risk since they are cleared through exchanges, but they also require margin deposits and are less flexible than the spot market.
Forex Swaps
Forex swaps are agreements between two parties to exchange currencies for a specified period and then reverse the transaction at a later date at a predetermined rate. These instruments are primarily used by banks, corporations, and financial institutions to manage interest rate risks and liquidity. Swaps can also be used in carry trading, where traders borrow in a low-interest currency and invest in a higher-yielding currency to profit from interest rate differentials. However, forex swaps are not commonly used by retail traders due to their complexity.
Forex Options
Forex options give traders the right, but not the obligation, to buy or sell a currency pair at a specified price before a predetermined expiry date. There are two main types of forex options: call options, which allow the holder to buy a currency pair, and put options, which allow the holder to sell. Options are used for both speculative and hedging purposes, offering traders a way to manage risk by limiting potential losses while keeping upside potential open. Options can be complex and profitable traders typically have a solid understanding of pricing models, time decay, and market volatility.
Exchange-Traded Funds (ETFs)
Forex ETFs track the performance of currency baskets or individual currency pairs. The fund shares are traded on stock exchanges in a manner similar to publicly traded company shares.
Buy buying and selling ETF shares, you can gain forex exposure to currency prices without engaging in direct currency trading. Forex ETFs are popular among investors looking to diversify their portfolio or hedge against currency risks without using leverage. While ETFs are less risky than leveraged forex trading, they tend to move more slowly and may not be suitable for traders seeking quick gains.
Types of Forex Trading
Forex trading can be approached in different ways, depending on a trader’s style, time commitment, and risk tolerance. Some traders focus on short-term price movements, while others take a longer-term approach. Understanding the different types of forex trading can help you choose the best strategy for your goals and experience level.
Below, we will take a look at a few different forex trading strategies.
Day Trading
Day trading involves opening and closing positions within the same trading day, avoiding overnight risks. This style requires strong market analysis skills and the discipline to stick to a trading plan even when you are under intense pressure.
Since no positions are held overnight, day traders avoid the risks associated with market gaps and news events that can cause sudden price swings.
Day trading is suitable for traders who rather handle very intense trading sessions than lay awake at night worrying about open positions.
Scalping – a type of day trading
Scalping is an ultra-short-term day trading style where traders aim to make small profits from each trade. Typically, a scalper will execute a higher number of trades throughout the day. Positions are usually held for a few seconds to a few minutes, taking advantage of tiny price movements. Scalpers rely on high-speed execution, tight spreads, and strong technical analysis skills to capitalize on rapid price fluctuations. This style requires full concentration and is best suited for traders who can make quick decisions.
Major currency pairs, i.e. pairs with very high liquidity, are often targeted by scalpers.
Swing Trading
Swing trading is a medium-term strategy where traders hold positions for several days or weeks, aiming to capitalize on larger price swings. Unlike the day trader, the swing trader will keep positions open over night, which means you need to concern yourself with overnight fees and overnight risks.
This type of trading typically relies heavily on technical analysis to identify trends, support and resistance levels, and potential reversals. Swing trading requires patience and allows traders to benefit from sustained price movements without the stress of making instant decisions.
Swing traders don’t need to monitor the market intensely to find the right minute to execute a trade, making it a flexible option for those who can’t commit to full-time trading. On the other hand, you will have positions open while you are trying to do other things in your life, and for some traders, this is very stressful. If you find yourself compulsively checking asset prices and news, or worrying about open positions, when you are away from the screen (despite having set stop-loss and take-profit points), you may be better off day trading.
Trend Trading
Trend trading is based on identifying and following market trends. Traders enter positions in the direction of the trend and hold them until signs of a reversal appear. This strategy can be applied in both short-term and long-term trading and often relies on technical indicators like moving averages and trendlines. Trend trading is effective in strong market conditions but requires patience and risk management to avoid false signals.
News Trading
News trading involves taking positions based on economic events, political developments, and financial news releases. Traders anticipate and react to key data such as central bank interest rate decisions, employment reports, and the release of GDP growth figures. This style can be highly profitable but is also risky due to sudden price volatility. News traders need to be quick in their execution and manage risk carefully, as market reactions to news can be unpredictable.
Position Trading
Position trading is a long-term approach where traders hold positions for weeks, months, or even years. This style is based on fundamental analysis, focusing on economic indicators, interest rates, and geopolitical events that influence currency values. Position traders aim to capture major trends and are less concerned with short-term price fluctuations. While this strategy requires a deep understanding of macroeconomic factors, it also involves less frequent trading, making it suitable for those who prefer a more hands-off approach.
Algorithmic Trading
Algorithmic trading, or automated trading, involves using computer programs to execute trades based on pre-set criteria. Traders utilize algorithms that analyse market conditions and enter or exit trades automatically when certain conditions are met. This style eliminates emotional decision-making in the heat of the moment and allows traders to take advantage of opportunities around the clock. While algorithmic trading can be highly effective, it comes with its own set of risks which should not be downplayed.
Forex Trading Software
Access to a trading platform is necessary for modern online forex trading and there are many platforms to chose among. In addition to this, there are also other types of forex trading software that can be helpful when it comes to analysing market trends and manage your account strategies efficiently.
Forex trading software can for instance provide access to real-time data, advanced charting tools, and automation features that enhance trading performance. With numerous choices available, picking the right ones is crucial. Which ones that are best for you will depend on a variety of factors, including your trading plan and technique, your experience level, and your individual preferences.
Trading Platforms
A trading platform is the core software that provides access to the forex market. These platforms allow traders to place buy and sell orders, analyse price movements, and manage positions.
Some of the most widely used platforms are MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader. MT4 is known for its customizable charts and support for automated trading through expert advisors (EAs). MT5 builds on MT4’s features with additional timeframes, asset classes, and advanced order execution options. cTrader, on the other hand, is especially popular among ECN traders due to its transparency, advanced order types, and intuitive design.
Instead of giving you access to an independent third-party trading platform such as the three mentioned above, many brokers instead offer proprietary trading platforms tailored to their specific services. Some brokers will even do both: you get access to their proprietary platform and one or more third-party platsforms.
Charting and Analysis Tools
For traders who rely on technical analysis, having robust charting and analysis software is crucial. Platforms like TradingView and NinjaTrader provide advanced charting capabilities, including customizable indicators, multiple chart types, and historical data analysis. TradingView is a cloud-based tool known for its social trading features, allowing traders to share strategies and insights. NinjaTrader is favoured by professional traders for its deep market analysis tools and automated trading capabilities. These platforms help traders identify trends, spot trading opportunities, and refine their strategies with precision.
Trading Software for Automated Trading
Automated trading software allow traders to execute trades based on predefined rules without manual intervention. This type of software is particularly useful for those who want to take advantage of market movements without being manually involved in every trade. Automated trading can help traders eliminate emotional decision-making in the heat of the moment and maintain consistency in their trading approach.
- The MetaTrader platforms (MT4 and MT5) support Expert Advisors (EAs), which enable algorithmic trading based on custom strategies.
- The software cAlgo can be integrated with cTrader to carry out automated trading using custom scripts.
Copy Trading
For traders who prefer to follow experienced professionals, copy trading and signal services provide an alternative approach. Platforms like eToro, ZuluTrade, and Myfxbook allow users to automatically replicate the trades of other traders in real time. These platforms offer transparency, allowing users to review traders’ past performance and risk levels before copying their trades. Copy trading is ideal for beginners or those who lack the time to develop their own strategies, as it enables them to benefit from the expertise of seasoned traders.
Economic Calendar and News Software
Fundamental analysis plays a significant role in forex trading, making access to real-time news and economic data essential. Websites like Forex Factory and Investing.com are two examples of companies that offer economic calendars that will help you track major market-moving events, such as central bank meetings, employment reports, and inflation data.
Some trading platforms come with integrated news feeds from sources like Reuters and Bloomberg, helping traders stay informed about news and financial developments without having to sign up for anything outside the platform.
Risk Management Software
Specialized software with risk management tools can help traders in a variety of ways, by making it easier to create a risk-management routine and stick to it.
Choosing the Right Forex Trading Software
Selecting the right forex trading software depends on several factors, including your trading plan and strategy, your experience levels, and which features you need. Examples of important points are ease of use, compatibility with your broker, and execution speed. Depending on your trading plan, features such as
technical analysis support and automation capabilities can also be vital. Whether you prioritize manual trading, automation, or social trading, having the right software can significantly improve your trading efficiency and decision-making.
Beginners may find platforms like eToro more accessible, while advanced traders may prefer cTrader, NinjaTrader, or TradingView for their advanced charting and execution features.
Testing different platforms using demo accounts can help traders determine which software best suits their needs before committing to live trading.
Forex Brokers
Selecting the right forex broker is one of the most important decisions a trader can make. A reliable broker provides access to the forex market, fair trading conditions, and strong security measures, while a poor choice can lead to high costs, execution issues, and even scams. With hundreds of brokers available, knowing what to look for can help you make an informed decision and ensure a smooth trading experience.
It is very important that you pick a broker that is suitable for your trading strategy, when it comes to factors such as assets, instruments, spreads, and fee structure (including commissions). When you compare brokers, compare them with your trading plan in mind. A broker that is ideal for one trading plan can be all kinds of wrong for another.
Regulation
The first and most crucial factor when choosing a forex broker is regulation. A regulated broker operates under the supervision of a financial authorities, and if that financial authority is strict and have strong trader protection rules in place, it will require things such as transparency, fair practices, and client fund segregation. Client fund segregation means that your money is kept separate from the broker’s operational funds, and this makes it easier for you to get your money back if the broker becomes insolvent.
To avoid a legally complex situation where several different jurisdictions come into play, it is usually a good idea to pick a forex broker regulated by a broker where you live and trade. Therefore, a trader in Australia should ideally pick a broker regulated by the Australian Securities and Investments Commission (ASIC), while a broker in the UK should pick a broker regulated by the UK Financial Conduct Authority (FCA). Traders within the European Union can typically feel safe picking a broker regulated in any of the EU membership countries.
With that said, some traders do not really have this choice, because they live in a jurisdiction where online forex brokers are not regulated and supervised, or where the applicable financial authority does not provide adequate trader protection and broker oversight. In such cases, forex traders that are okay with a bit of legal complexity will typically pick an international forex broker regulated by a renowned financial authorities in another country, e.g. the UK Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC), the Commodity Futures Trading Commission (CFTC) in the U.S., or CySEC in Cyprus.
Only using forex brokers that are regulated by a reputable financial authority can help you reduce the risk of falling victim to scams and unethical practices, and serious financial authorities will typically also offer conflict resolution services that are more accessible to traders than a full on civil law suit in case there is an issue that you can not resolve directly with your broker.
Costs: Spreads, Commissions, and more
Forex brokers normally make the bulk of their money through spreads (the difference between the bid and ask price) and commissions charged per trade.
They can also charge miscellaneous other fees, such as platform fee, inactivity fee, overnight fee, leverage fee, and processing fees for deposits and withdrawals.
When you compare brokers, it is important that you take the entire fee structure into account and see what it would cost to implement your particular trading strategy with this broker. Even seemingly small costs can erode your profits and make a big difference over time. Each penny you pay in fees is a penny that wont earn you any money from trading, so make sure it is worth it.
About spreads
Some brokers offer fixed spreads, while others have variable spreads that change depending on market conditions. Tight spreads generally mean lower trading costs, making them preferable for active traders. ECN and STP brokers usually offer raw spreads but charge a commission per trade, while market makers often incorporate their fees into wider spreads. When a broker offers commission free trading (zero commission trading) they will usually compensate themselves through wider spreads.
About commissions
Brokers can charge both buy commissions and sell commissions. Commissions can be fixed (a fixed amount per trade) or a percentage. With some brokers that charge a percentage, you will still always pay at least $X in commission, to make sure the broker earn enough even on tiny trades.
Trading Platforms and Tools
The trading platform is your primary tool for analysing markets and executing trades, so it needs to be reliable, easy to use, and suitable for your trading plan.
Many brokers offer access to third-party independent platforms, such as MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader, but there are also plenty of broker that have proprietary platforms with unique features.
Examples of good things to have are real-time price feeds, fast execution speeds, and mobile compatibility for on-the-go trading and account management.
Some brokers also provide additional services (free or for an additional fee), such as trading signals, market news, and economic calendars, which can help improve decision-making.
Leverage and Margin Requirements
Leverage allows traders to control larger positions with a smaller amount of capital, amplifying both gains and losses. While high leverage can be tempting, it also increases risk, so traders should choose leverage wisely and employ a stringent risk-management plan that takes leverage into account.
Forex brokers are known for offering exceptionally high leverage, but in many jurisdictions ceilings are now in place that limits how much leverage the broker can offer to a retail trader (non-professional trader). If you want to be classified as a professional trader to have the ceiling removed, contact the broker´s customer support to find out about the legal requirements and see if you meet them.
When there are no ceilings in place, many fx brokers offer up to 1:500 in leverage, and some even go up to 1:1000.
In jurisdictions with ceilings for retail traders, the cap is typically 1:30 for major currency pairs and even lower for minor currency pairs and exotic currency pairs.
Before you use any leverage, make sure you understand how it works, the risks involved, and the margin requirements.
If you account has negative balance protection, make sure you understand what that entails in with your particular brokers. The broker may have the right (or even a legal obligation) to automatically close one or more leveraged positions if the market moves against you beyond a certain point.
Deposits and Withdrawals
A broker’s deposit and withdrawal process should be fast, straightforward, and transparent. Look for brokers that support at least one payment method that you are okay with using, such as bank transfers, credit/debit cards, PayPal, Skrill, or cryptocurrency. Wire transfers and checks tend to be both costly and slow.
Before opening an account, check if the broker charges fees on deposits and/or withdrawals. Also check with the trading community and try to find out how long it takes for this broker to process withdrawal requests (on average). Research reviews from other traders to see if the broker has a history of delayed withdrawals, poor execution, or hidden fees. A broker with strong client feedback is more likely to provide a trustworthy trading experience. Delayed withdrawals or excessive fees are red flags that may indicate a broker is unreliable.
You can expect to be required to complete a Know-Your-Customer (KYC) check before you first withdrawal, but this should be a straightforward process.
Customer Support and Reputation
Reliable customer support is important and it is a good idea to test the broker’s response time and service level through live chat, email, or phone support before opening an account.
- If the support is not staffed 24/7 or at least 24/5, make sure it is staffed when you are likely to trade.
- Look for brokers that offer support in a language you are okay with using.
- Which is your preferred contact method and is it available?
- If phone support is important to you, make sure you wont be required to make a potentially expensive phone call to another country or premium-rate number.
Security
Security is a critical aspect of forex trading software. A reliable platform should offer secure login methods, data encryption, and two-factor authentication (2FA) to protect your account.
How To Chose The Right Forex Broker
Which forex broker that will be ideal for you depends on many different factors, including your trading plan, trading technique, experience level, and risk tolerance. If you have more than one trading plan, you may find that the best choice is to open accounts with more than one broker, instead of trying to find a mediocre compromise.
Examples:
- Scalpers and other day traders should generally prioritize brokers with tight spreads and fast execution, while long-term traders may wish to focus more on low overnight rates.
- A novice trader may find an advanced and comprehensive trading platform cluttered and overwhelming, and might prefer to start with a proprietary broker platform with a more minimalist approach.
- A day trader relying heavily on technical analysis will probably prioritize a strong support for this – including the ability to place orders directly from the charting area. For a longer-term trader, it may be okay to use third-party software for the analysis.
By considering factors like regulation, costs, platforms, and customer service, you can find a broker that supports your trading goals and provides a secure, efficient trading environment.
Always test a broker and the platform using a free demo account before committing any real money, to ensure they meet your needs and expectations. Actually putting in orders and see them executed is very different from just reading about a platform or looking at screen shots. If a broker do not want to give you access to a demo account before you have made your first deposit, consider it a bit of a warning sign. There are so many good brokers and platforms out there that would be thrilled to let you check them out using a free demo account, no strings attached, so there is no need to pick one that want to hide their software until you have parted with your money.
This article was last updated on: February 25, 2025