Example
Imagine you had a bearish – negative – view on the pound and wanted to sell it against the US dollar.
Let’s say you decided to sell Monday morning and hold the trade until Friday evening when you closed the position.
You can do this by short-selling the pound-dollar currency pair using a CfD from one of the major providers mentioned above.
Analysis by eToro shows that if you open the position with $1,000, and you decide to leverage by a factor of 10 and the value of the pound fell 2.02pc against the dollar, your return would be $200 – giving you a 20pc return on your original investment.
Forex trading for beginners FAQs
Is forex trading good for beginners?
Forex trading is complex and high-risk no matter what strategy you decide to adopt. Look out for providers that offer online tutorials or the option to have a go at trading on demonstration accounts with virtual money.
You might want to stick to less risky currencies and start with those such as the US dollar, the Japanese yen and the Swiss franc, rather than those from emerging markets
Can I learn to trade forex on my own?
Being successful as a newcomer requires a good understanding of global events and the time to follow trends closely. Take all the help you can get using online guides and talking to experts you have access to.
Can a beginner make money in forex?
As with any investment it is possible to make large sums quickly but often this will be down to luck rather than skill. Only invest what you can afford to lose.
Long-term savings should be put into a mixture of saving accounts and more conventional investments.
Inexperienced beginners should tread with caution and make sure they understand the risks involved.
If you decide you need a little help, you could look to instead invest in a currency exchange-traded fund (ETF), providing exposure to the performance of a currency when compared to another or a broader basket of currencies. This means you do not have to choose the trades yourself.
Do I pay tax on forex trades?
As a full-time self-employed forex trader, you will pay tax on profits over the tax-free personal allowance. However, as a private investor, the rules are different. How you pay tax depends on the way you trade.
For instance, if you use spread betting, you do not own the assets you are betting on. But if you trade CfDs and make a profit, that money will be subject to capital gains tax over and above the annual £3,000 allowance.
Tax on forex trading can get complicated, so it is best to get advice to make sure you are clear on what tax you might owe.