How to trade forex with IG

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Forex is one of the most popular markets among IG clients, and we offer several flexible ways of speculating on currency markets. Find out more about contracts for difference (CFDs) and digital 100 trading with forex.

CFD trading
A forex CFD is a contract that allows you to exchange the difference in price of a currency pair between the time you open your position and the time you close it. Open a long position, and if the forex position increases in price you’ll make a profit. If it drops in price, you’ll make a loss. Open a short position, and the opposite is true.

You can trade using leverage and won’t have to pay commission to open a position. CFDs are liable for capital gains tax, but you can offset your losses against profits for tax purposes, making them a good product for hedging.1

Find out more about CFD trading with IG

Forex Direct
Experienced CFD traders can interact directly with market makers’ order books using Forex Direct, our DMA service. So you can buy and sell forex without the spread – instead trading at the prices offered by currency providers, plus a variable commission.

Forex Direct provides full transparency over the prices available in the market, allowing you to see extensive data on currency pair prices. You can use it to be more flexible about the price you trade at, or to act as market maker.

CFD trade on forex example
1. You open a short position on EUR/CHF, when the pair is trading at 1.0815.

2. You choose the size of your position. Each CFD contract is equal to a single lot in the base currency, so trading a single CFD is equivalent to selling €100,000, or an equivalent of 10 CHF per point of movement.

3. EUR/CHF drops to 1.0790, and you buy a single CFD to close your position.

4. The profit on your short trade is 2300 CHF. If you’d chosen to go long instead, you would have lost 2700 CHF. Profit or loss is realised in the base currency of your account.

Opening a forex CFD
To open a forex CFD with IG, you can first of all choose whether you’d like to trade at our price, or whether you’d like to use Forex Direct. Forex Direct is recommended for advanced traders, with trades charged via commission instead of the spread.

To trade forex at our price, choose which pair you’d like to trade and then open a deal ticket by hitting its name on our platform. You can choose the number of contracts you’d like to trade, which are usually equal to a single lot in the given base currency.

Digital 100s
A forex digital 100 asks you a question about a currency pair with two possible outcomes. If you predict the correct outcome, your position will return a profit. If you choose the wrong outcome, you’ll lose your original stake. The digital 100s price reflects the time left until expiry, and how likely it is that the statement will come true. If it does come true, the digital 100 price will settle at 100. If it doesn’t, it will settle at zero.

Like CFDs, digital 100s allow you to take long and short views on a host of currency pairs. Unlike some other forms of derivative, though, you’ll always know your total potential profit or loss before you open a digital 100 position. That’s because digital 100s only have two possible outcomes: you position settles at 100, or settles at zero and you lose your stake.

More about digital 100s with IG

Opening a forex digital 100
For example, a forex digital 100 might ask you whether EUR/GBP will be above 0.8215 at midday. It has three hours left until it expires, and EUR/GBP is trading at 0.8206. You believe that there is a strong likelihood that it will end up above 0.8215, so you buy the digital 100 at its current price of 45.

You set your stake at the equivalent of £10 per point, making your total position worth £450. If EUR/GBP is above 0.8215 at midday then the digital 100 will settle at 100. Your position will now be worth £1000 and you will have made a £550 profit. If EUR/GBP is beneath 0.8215 at midday then the digital 100 will settle at 0, and you’ll lose your £450 stake.

The digital 100 price will change as its expiry date nears, reflecting the likelihood that the proposed outcome will arise. You don’t have wait for a digital 100 to expire before closing your position: you could exit the trade when the binary is trading at 20, for instance, cutting your losses to £250 (as long as it then settles at zero).

Digital 100s trade on forex example
1. You open a binary position on USD/JPY to be above 10100, expiring at the end of the trading day. Our binary price for the trade is 75, and you think the statement will come true so you buy the binary.

2. You choose your stake in contracts for CFD accounts.

3. At the end of the trading day, USD/JPY is trading at 10115, and our digital 100 settles at 100.

4. Your profit on the CFD trade would be ¥23,000 (around £170)

5. If USD/JPY had been below 10100, the digital 100 would have settled at 0 and you would have lost your original stake. Alternatively, you could have closed the trade at any time before expiry.

What is CFD trading?

CFD trading is the buying and selling of CFDs, or contracts for difference, a way of speculating on financial markets that doesn’t require the buying and selling of any underlying assets

CFD trading allows you to trade markets like equities, forex, indices and commodities without having to buy and sell shares, currencies or futures. Instead you trade a contract known as a CFD, a form of derivative that offers several advantages over traditional trading.

What are contracts for difference?

A contract for difference is a type of derivative which works by acting as an agreement to exchange the difference in value of an asset between the point at which the contract is opened and when it is closed.

The price at which a CFD is trading will always match the current market price of its underlying asset. If you wish to buy a share CFD of Apple, for instance, then your CFD will increase in value as Apple’s share price increases. If Apple’s share price decreases then your CFD loses value accordingly.

However, there are several differences between trading a CFD and traditional trading. Two key differences are the ability to go long and short, and leverage.

Long vs short

You don’t have to use a CFD to mimic a standard trade – you can also open a CFD position that will increase in value as the underlying market decreases in price. This is referred to as selling or going short, as opposed to buying or going long.

If you think Apple shares are going to fall in price, for example, you could sell a share CFD in the company. You’ll still exchange the difference in price between when your position is opened and when it is closed, but will earn a profit if the shares drop in price and a loss if they increase in price.

With both long and short trades, profits and losses will be realised once the position is closed.

Leverage

You can also use a CFD to get exposure to a much larger position than with a standard trade. Using leverage, you can agree to exchange the difference in price of a larger amount of an asset without having to commit to the full cost of the position at the outset.

Say you wanted to open a position equivalent to 500 Apple shares. With a standard trade, that would mean paying the full cost of the shares. With a CFD, you might have to only put up 5% of the cost.

You’ll still exchange the difference in price of 500 Apple shares from when your position is opened to when it is closed, so your profit and loss will still be calculated on the full size of your position. That means that profits can be hugely multiplied: but that your losses can as well, even above your original deposit.

Why do traders use CFDs?

Beyond the ability to go short and make use of leverage, there are several key reasons why traders use CFDs:

Hedging

One key reason why many traders use CFDs is as a method of hedging against other open positions. If you own an asset in your portfolio that you believe may lose some of its value, CFDs can offset some of the potential loss by short selling.

For example, let’s say you hold £1000 worth of Vodafone shares in your portfolio. If you short £1000 worth of Vodafone shares through a CFD trade, then should Vodafone’s share price fall in the underlying market, the loss in value of your share portfolio would be offset by a gain in your short CFD trade.

But there’s more to CFD trading than the CFDs themselves.

How does forex trading work?

When you open a forex position, you are buying one currency while simultaneously selling another. Read on for a detailed look at how a forex trade works: including currency pairs, the spread, pips and leverage.

1. Currency pairs

Forex Trading always involves selling one currency in order to buy another. For this reason, they are quoted in pairs that show which currency is being bought and which is being sold. Each currency in the pair is listed in the form of its three letter code, which tends to be formed of two letters that stand for the region, and one standing for the currency itself.

GBP/USD, for instance, is a currency pair that involves the Great British pound and the US dollar. In this pair, you are buying pound sterling by selling US dollars.

Base and quote currency

The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency. The price of a forex pair is how much one unit of the base currency is worth in the quote currency.

So in the above example, GBP is the base currency and USD is the quote currency. If GBP/USD is trading at 1.35361, then one pound is worth 1.35361 dollars.

If the pound rises against the dollar, then a single pound will be worth more dollars and the pair’s price will increase. If it drops, the pair’s price will decrease. So if you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (going long). If you think it will weaken, you can sell the pair (going short).

2. The spread

The spread is the difference between the buy and sell prices quoted for a forex pair.

Like many financial markets, when you open a forex position you’ll be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.

3. Pips

When a forex pair increases or decreases in price, that movement is measured in units called pips. A pip is usually equivalent to a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35471, then it has moved a single pip.

The exception to this rule is when the quote currency is listed in much smaller denominations, with the most notable example being the Japanese yen. Here, a movement in the second decimal place constitutes a single pip.

The decimal places shown after the pip are called fractional pips, or sometimes pipettes.

Leverage allows you to get exposure to large amounts of currency without having to commit too much capital.

A single pip is a very small unit of movement, and while forex pairs tend to be very volatile they often move in relatively minor increments. For this reason, forex traders will either have to trade large batches known as lots, or take advantage of leverage.

A standard lot is 100,000 units of currency. Alternatively, you can sometimes trade mini lots and micro lots, worth 10,000 and 1,000 units respectively.

Individual traders don’t necessarily have 100,000 pounds, dollars or euros to place on every trade, so many forex trading providers offer leveraged trading. Leverage allows you to open a position without having to pay its full value upfront. A trade on EUR/GBP, for instance, might only require 0.5% of the total value of the position to be paid in order for it to be opened.

When you close a leveraged position, the profit or loss is based on the full size of the trade. While that does offer a chance of higher profits, it also brings the risk of amplified losses: including losses that can exceed your deposits.