10 Best Forex Brokers UK for FX Trading Compared in 2021
What is forex trading?
Forex trading is the largest and most liquid financial market in the world involving the changing of one currency into another, often with the anticipation of making a profit in doing so.
The foreign exchange market, also known as the FX market or forex market, is the global market for the exchange of one currency to another. This can be conducted for commerce, trading, or tourism reasons and forex is usually traded as exchange rate pairs. An example of an exchange rate pair or currency pair would be GBP/USD which is the pair for trading the Great British Pound against the U.S dollar.
In contrast to a stock market, with forex trading, there is no central marketplace. Currency trading is conducted electronically over the counter (OTC) via computer networks among traders from across the globe. This means the market is open 24 hours a day for five and a half days a week with price changes constantly moving. This allows for speculative opportunities for trading one currency against another for professional traders and retail investors.
How to trade forex
There are two ways to trade currencies. The first is to earn the interest rate differential between two currencies. This works by buying the currency with the higher interest rate, and shorting the currency with the lower interest rate.
The other way to trade currencies is to profit from changes in the exchange rate.
These fluctuations in the price of a currency will depend on the supply and demand from banks participating in the spot market. These large trade flows prevent rogue traders from having any influence on the price of any given currency, which in turn helps to provide some transparency for investors.
What influences price changes in the FX market?
The value of any particular currency is based on supply and demand, however, there are some currencies such as the Chinese renminbi which have a fixed exchange rate. Currencies without a fixed exchange rate are known as floating currencies, and this is the case for most advanced economies, including the UK pound.
Floating currencies are constantly moving up and down in value against other currencies. These are usually small changes in movement, as small as a fraction of a cent higher or lower at the end of a trading day. However, this can change dramatically at the hands of extreme economic or political news. In this instance, there can ensue wild swings in price, such as a fall in value of 10% the day after the UK voted to leave the European Union. This encouraged traders to sell the pound quickly, decreasing its demand, and thus its value.
Another example of a market influencer are economic developments such as data that reveals the economy is growing faster than predicted, which in turn could lead to the Bank of England increasing interest rates. Higher interest rates lead to a greater return on your money and therefore increases demand, boosting its value. This is how financial markets ebb and flow in line with economic, financial and political news.
The best forex trading platforms will often include live news feeds in their suite of tools to enhance retail traders capacity for profit. This is also the reason why mobile trading is so important, so traders can react instantly to changes that may affect the price of currencies.
Why is FX trading so popular?
Forex trading is arguably one of the most popular forms of investment with a daily average trading volume of about $5 trillion.
The main reason for this demand among investors is that forex is one of the largest financial markets in the world with the potential for quick, large returns on your investment. This is largely due to the high volume of currencies being traded which in turn creates liquidity. However, there is a downside to this amount of liquidity, and potential investors should always be aware that with the potential for high gains, comes the potential for high losses and most platforms will report that more retail investment accounts lose money when trading CFDs and forex than gain money.
However, this all comes down to strategy, and the right amount of knowledge can result in significant profit. This alongside the fact that the forex market is available for trading 24 hours a day for five and a half days of the week means individual investors can react quickly to market influencers such as political and economic factors.
These rapid movements set the bar for potential immediate gains, unlike the stocks and shares market whereby time in the market is more of an influence to your success than timing the market.
In addition to this, the forex market benefits from leveraged trading, whereby investors can open a position on a larger portion of the forex market, without risking the full investment amount usually required.
This increased exposure can lead to increased gains, without having to risk the same amount of money that would usually be needed for such a trade. However, it is important to fully understand how leverage trading works and how you can benefit from it, as this increase in profits can just as easily lead to an increase in losses.
Is FX trading legal in the UK?
Yes, FX trading is legal in the UK, although each platform will have its own level of regulation and this is always worth checking. On the whole, forex brokers in the UK are regulated by the Financial Conduct Authority (FCA) who are responsible for ensuring that all UK forex brokers are licenced and are providing a trading environment that is in the best interests of the traders that use it. Regulation by the Financial Conduct Authority also provides protection of your funds under the Financial Services Compensation Scheme (FSCS) which aims to compensate traders for the loss of their trading funds in the event the broker runs into insolvency issues.
In addition to this, the FCA requires that a multi-asset trading platform keep its operating capital separate to that of its traders to ensure this is protected should the platform experience financial difficulty.
However, it may be the case that some forex brokers are regulated by a similar body outside of the UK. These regulators will be responsible for the same level of regulation as the FCA and can include:
- Securities and Exchange Commission (SEC) and the National Futures Association (NFA) in the USA
- Australian Securities and Markets Authority (ASIC) in Australia
- European Securities and Markets Authority (ESMA) in the European Union
- Autorité des Marchés Financiers (AMF) in France
- Comisión Nacional de Mercado de Valores (CNMV) in Spain
- The Financial Services Agency (FSA) in Japan
- The Securities and Futures Commission (SFC) in Hong Kong
This level of regulation should be considered a minimum when selecting a forex trading platform in order to ensure correct levels of protection for you and your funds. This can be confirmed on the FCA’s own website where they supply a register of all forex brokers in the UK who adhere to these standards.