How to Make Money with Forex Trade

Forex is the most widely traded market in the world, with more than $4 trillion being bought and sold every single day. You can speculate on the future direction of currencies, taking either a long or short position depending on whether you think the currency’s value will go up or down.

How does FX trading work?

When it comes to trading FX, most currencies come in pairs. Take for example GBP/USD (sterling vs US dollar) – the fluctuations in the exchange rate between these two is where a trader looks to make their profit.

In our example, a trader believes that GBP will strengthen (or ‘appreciate’) against the USD and therefore buys GBP. By buying GBP, they’re also simultaneously selling USD on expectations that the exchange price will rise in value.

Should their expectation be proved right, the trader’s profits will rise in line with every increase in the exchange price.

The trader then decides to close the position, selling GBP; in this case with the exchange price higher than when they first bought it, netting them a tidy profit.

Conversely, if the trader is proved wrong and GBP depreciates in relation to USD, the GBP/USD exchange price will fall. This leaves the trader sitting on a loss, as each fall in the exchange price below their open level will net them a loss.

We give you the option of buying or selling currency pairs, so you can make a profit no matter which way the exchange price between the two currencies is moving. Instead of buying GBP, as in the above example, traders can sell GBP should they think its value will fall or that the USD will strengthen, potentially making them a profit if the exchange price then falls.

How can I trade FX?

There are three unique ways to trade on the foreign exchange markets with City Index, winner of FX provider of the year, as voted by UK Forex 2014:

Spread betting allows you to speculate on currency markets 24-hours a day. Take advantage of variable spreads from just 0.5pts and profit completely tax-free* in the UK. Discover more about spread betting

CFD trading enables you to speculate on the forex markets with no expiry date on your positions. Like spread betting, there’s no stamp duty to pay but gains are liable for CGT in the UK*. Learn more about CFDs.

MT4 is one of the world’s most popular FX trading platforms, City Index MT4 also offers some of the industry’s lowest spreads on FX pairs and is fully compatible with expert advisors. Read more about MT4. Read more about MT4.

No matter which way you choose to trade with us, you’ll benefit from our low margins, 24-hour trading and award-winning range of platforms and apps.

Forex Trading Example

Going Long on GBP/USD (Sterling/US dollar)

Going long

It is the first Friday of the month and let’s assume that GBP/USD is currently trading at 1.5686/1.5688.

Traders are concerned about the employment situation in the US. They expect the level of actual non-farm payrolls to come in worse than economist estimates.

You expect that the US dollar will weaken and the British pound will strengthen against the US dollar, and decide to buy (go long) £10,000 on GBP/USD at 1.5688.

The trade size is in units of the first, or base, currency in the pair. For this trade, you choose a leverage scale of 50:1.

This requires an initial deposit of (£10,000*1.5688/50) $313.76. Find out more about Leverage.

As you anticipated, the pound strengthens against the dollar, and when it reaches 1.5750 you decide to cash in your profits. Our new price is 1.5750/1.5752 and you sell to close at 1.5750.

Result: You bought at 1.5688 and sold at 1.5750, a rise of 62 pts. This gives you a profit of:

(1.5750 – 1.5688) x 10,000 = $62.

Profit/Loss is calculated (and denominated) in the second, or counter currency of the pair.

Profit/Loss calculation: The difference between the closing price and opening price x size of trade.

Alternative scenario: If however, the actual non-farm payroll data had come in better-than-expected, the US dollar would have strengthened against the pound.

If GBP/USD would have gone down, say, to 1.5630 you would lose (1.5688 – 1.5630) x 10,000 = $58.

Profit/Loss Conversion: To help simplify the trading process, City Index automatically converts trading P&L into the client’s denominated account currency at the prevailing market rate at the time that the trade is closed.