What is the Foreign exchange market?
The foreign exchange market, also known as the forex (or even more simply, the FX market), is the largest financial market in the world. Every day, trillions of pounds of global currencies are traded in what are called “pairs”, i.e. the exchange of one currency for another, such as pounds for dollars, euros for Japanese yen, etc. These transactions are carried out five days a week, 24 hours a day around the globe and determine the value of every currency on the planet second by second, based on supply and demand. So, if the pound is in demand, its value against, for example, the dollar will rise and vice versa.
Given its scale and breadth, forex trading is easily accessible by individual investors, who can open an account with a few hundred pounds and begin trading immediately. But it is easy to lose money, especially if you are a beginner. Trading successfully requires effort, discipline and a determination to learn as much as you can about the market before you start. You also need to understand the regulations governing the market, the costs of trading and which brokers to use. Most importantly, you should understand the risks and disadvantages before deciding whether forex trading is for you.
Why does the forex market exist?
There are many reasons why people trade currencies. UK companies may need to buy dollars to pay for American imports, or they may need euros to pay for the acquisition of a company based in Europe. Central banks, such as the Bank of England, can intervene in FX markets, buying and selling currency to manipulate its value for reasons of economic policy. Speculators also drive a very large part of the market, trading with the aim of generating a profit.
Large financial institutions, multinational corporations and hedge funds dominate the forex market, which reached a value of US$6.6 trillion per day in April 2019, according to the latest statistics.[i] That size means it is a hugely liquid market, i.e. it is very easy to buy and sell currencies because there are so many buyers and sellers in the market for most currencies.
Market drivers
The pound is a free-floating currency. In other words, the value of sterling in the FX markets is determined by supply and demand. This is the case for the currencies of most advanced economies. By contrast, some currencies, such as the Chinese renminbi (RMB), have a fixed exchange rate. The Chinese authorities determine the value of the RMB against the dollar and keep the link until they decide to alter the exchange rate. Clearly, there is no potential for individual traders to profit from trading currencies with a fixed exchange rate.
The value of a floating currency such as the UK pound, however, is constantly moving up and down against other currencies. Often these movements are relatively small, so the pound may begin the trading day buying one dollar and forty cents and end a fraction of a cent higher or lower, or even back at its opening level. But dramatic economic or political news can spark much greater volatility. For example, the pound fell by around 10% the day after the UK had voted to leave the European Union, back on 23 June 2016. Traders, fearing a prolonged period of political and economic uncertainty, sold the pound as quickly as they could.[ii]
Economic developments are also a key influence. New data suggesting the economy is growing faster than anticipated might spark concerns that the Bank of England could raise interest rates to rein in growth. Higher interest rates enhance the appeal of holding a currency, since you are getting a bigger return on your money. That outlook consequently boosts demand for the pound and its value rises. Similarly, if the UK’s economic outlook darkens and traders anticipate the Bank of England will cut interest rates, they will sell the pound, so depressing its value against other currencies.
That is why FX traders follow economic, financial and political news so closely, looking for any hint of information that could sway the value of the pound. They are hoping to react before other traders spot the development. Or they may take bets on a likely development, believing they have some insight that other traders lack. So, for example, on the day of the Brexit vote, before the results were announced, the pound soared in value because many traders were convinced that Remain had won.
Why is forex trading popular in the UK?
Forex trading is the largest and most easily accessible market in the world. The costs involved are relatively low compared with other markets, there are lots of brokers to choose from in the UK, and it is relatively easy to understand the ways in which you can trade the market. There are many freely floating currencies and since they can all be traded against each other there are a huge number of currency pairs to trade in. A vast amount of information is available to would-be traders, ranging from how to get started to outlining potentially profitable trading strategies.
You can trade from your living room using a fairly basic computer if you download the appropriate trading software, and it is relatively easy to set up an account with a broker. Unlike other financial markets, you can also exploit the concept of “leverage”, where you make use of borrowed money to increase your potential profits (and your losses). To explain what this means, currency pairs are traded in specific amounts called lots. They tend to be in 100,000 units of a currency, so, for example, if you are trading in the pound sterling against the US dollar, you would buy or sell £100,000 at a time. Since most people don’t have £100,000 available to trade, the broker effectively offers to lend you money. So, they may allow you to trade in a lot of £100,000 by opening an account with £1,000 and lend you the remainder. The initial £1,000 is known as the margin and your leverage in this case would amount to 100 to one (100:1).
As we mentioned, as well as increasing potential profits, leverage can dramatically increase risk. There are methods you can use to contain risk, but that is a topic for another article.
The disadvantages of forex trading
Forex trading requires a considerable commitment. It takes time to learn how to trade profitably, and when you start to trade you may have to spend many hours per day on your computer screen following and researching what is happening in the market – and why – in preparation for your trading day. When that day is finished, you will need to analyse what happened and why your trading activities succeeded or failed, so that you can apply the lessons learnt to the next day’s trading. There could be days when you lose money and it is easy to become disheartened. There is certainly no guarantee of success. FX trading can be risky and you can lose money or you may find that it is simply not something you like or have the temperament for. You have to be patient, for example, waiting for opportunities to arise, and the market can experience bouts of extreme volatility that you may find highly stressful.
Introduction to the regulation of the UK market
Trading is legal in the UK, and UK-based brokers that provide the services needed to become an FX trader are regulated by the Financial Conduct Authority (FCA), the government body responsible for overseeing the regulation of financial services and markets in the UK. In the words of the FCA, it aims “to make markets work well – for individuals, for business, large and small, and for the economy as a whole”.[iii] Regulation is positive for traders because it means they have recourse to legal action if they feel they have been unfairly treated or have even been the target of fraudsters.
The FCA urges traders to use brokers that it regulates. It has a register of firms that allows you to check that you are indeed using an FCA-regulated broker. The Authority warns that if a broker is not listed on its register, “it’s probably a scam”. The FCA also maintains a warning list of firms to avoid.
The FCA adds that:
If the firm’s contact details aren’t on the register or the firm claims they’re out of date, call our Consumer Helpline on 0800 111 6768.
You should check the firm isn’t a clone firm by asking for their firm reference number (FRN) and contact details and then calling them back on the switchboard number on our Register – never use a link in an email or website from the firm offering you an investment.
Always be wary if you’re contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true.
You should seriously consider seeking financial advice or guidance before investing. You should make sure that any firm you deal with is regulated by us and never take investment advice from the company that contacted you, as this may be part of the scam.
All of the above is excellent advice and you should follow it before registering with any FX broker. If you think you have been scammed, you can report the firm or scam to the FCA by contacting its Consumer Helpline on 0800 111 6768 or using its reporting form.
FX trading scams
The FCA warns that UK consumers are increasingly being targeted “by unauthorised forex trading and brokerage firms offering the chance to trade in foreign exchange” and other financial instruments. These firms promise “very high returns and guaranteed profits, either through a managed account where the firm makes trades on the investor’s behalf or by trading using the firm’s trading platform”.
Many scam firms claim to be based in the UK and even claim to be FCA-authorised. They may even clone the details of firms that are registered with the FCA but give their own phone number, address and website details, “sometimes claiming that a firm’s contact details on the Register are out of date”, according to the FCA.
That is why it is so important to check that a firm really is authorised by the FCA, scrutinising all their details carefully with the FCA register. If you have any doubts about a firm, call the FCA’s Consumer Helpline.
Applying for compensation
If the broker you use is regulated by the FCA and goes out of business, meaning that it can’t pay any money you are owed, you may be eligible for compensation under the Financial Services Compensation Scheme (FSCS). This is essentially an insurance scheme, funded by an annual levy on firms authorised by the FCA and the Prudential Regulation Authority (PRA), an entity the Bank of England uses to regulate financial services firms in the UK. The FSCS is independent of the government and its services are free to consumers. It provides compensation of up to £85,000 in total across all the accounts you hold with a forex broker.
The disadvantages of using an FCA-regulated broker
FCA regulations can limit your options when trading FX. FCA regulations require brokers to follow rules that are specific to the UK. An example is leverage limitation: retail traders are limited to 30:1 leverage. An unregulated broker, by contrast, could offer a 500:1 ratio. Offshore brokers also tend to have lower costs, which they can pass onto you in terms of lower trading fees in terms of lower commissions or better spreads.
Key FCA regulations
All FCA regulated forex brokers are required to adhere to the strict guidelines enforced by the FCA, which are designed to protect consumers. These include keeping their client funds segregated, or separate, from their company accounts, and not using their traders’ money for any other purposes. Every FCA regulated broker is required to have at least £1 million in operating capital, which increases according to the number of traders and the trading capital. Brokers must ensure that all withdrawals are processed instantaneously and that the company can meet all financial obligations without fail. Forex brokers are required to communicate any changes made in their service or terms of conditions to their clients and undergo regular audits.
Comparing forex brokers in the UK
A forex broker provides traders with a platform that gives them access to the FX market and allows them to buy and sell currencies. Opening an account is simple and can be done online. You will be asked to provide proof of identity and a deposit.
Using an offshore broker – the pros and cons
However, you don’t have to use a UK-based trader regulated by the FCA. You can open an account with an offshore broker, i.e. a company based outside the UK, or even outside Europe.
There are advantages and disadvantages to using an offshore broker. The main advantage, as discussed above, is that you won’t be subject to the same restrictions as when using a UK-based broker regulated by the FCA. The disadvantages include the fact that if you use a broker registered in another country, it will be subject to the regulations of that country and it may not be as well supervised as a UK firm. If things go wrong and your broker is registered in a country thousands of miles from the UK, it might be difficult to gain legal redress.
There are things you should consider whether you use an FCA-registered broker or one based offshore. These include:
- The trading experience – is the trading platform easy to use, what kind of support do they offer, and are there tools that can help with research, etc?
- Trading costs and transparency – these can vary widely from broker to broker. Some charge a fixed commission regardless of how much you trade, while others charge a fee based on trading volume (the higher the volume, the greater the commission). Other brokers don’t charge a commission but instead charge a spread fee. The spread is the difference between the price the broker quotes you for buying a currency and the price it quotes for selling it. This is effectively the fee your broker charges you to trade. (For example, imagine the US dollar is trading at 1.40 to the pound and you decide to buy some dollars. The broker may quote you a price of 1.4002, so you have been charged two pips – “percentage in point” or “price interest point” – for your trade. The pip is thus $0.0001 for US dollar-related currency pairs.) It is also important to be aware of the hidden fees some brokers charge, such as inactivity fees, monthly or quarterly minimums, and fees associated with calling a broker on the phone.
- Customer service – you can trade anytime over 24 hours five days a week so do they offer 24 support during trading hours? Is help available instantaneously online or via the phone or do you have to wait for long? You can check by calling the broker at different times of the day before signing up.
- The size of the minimum deposit. This can vary from just £1 to £300 although you can open an account with most brokers for around £100.
- Maximum leverage offered. This is a standard 30:1 ratio for forex brokers in the UK regulated by the FCA. But offshore brokers can offer higher levels of leverage with some providing a 500:1 ratio.
How to Compare Forex Brokers in the UK
Though Forex brokers might appear to be similar, they are quite different once you dig a little deeper, and account conditions will vary for UK residents. These are some of the most common questions traders will have when comparing Forex brokers.
Forex Brokers for Beginners
Forex Broker Fees and Trading Costs:
Other Trading Options
Forex Broker Regulation
Forex Broker Customer Support:
Forex Trading Platforms:
Do I Need a Broker to Trade Forex?
Yes, you will need a broker to trade Forex. Connecting traders to the Forex market is an expensive and technically complex business. It’s important to choose a regulated Forex broker with low costs and a history of treating its clients fairly.
Which is the Best Broker in the UK?
The best broker in the UK is IG Markets. The world’s largest CFD broker by revenue, IG Markets is also publicly listed and a member of the FTSE 250. Forex trading at IG Markets is commission-free, and with spreads starting at 0.6 pips on the EUR/USD, IG has some of the cheapest trading costs in the industry. IG also has the most CFDs to trade in the world, including commodities, indices, 16,000+ shares and ETFs, options, interest rates and bonds. Negative balance protection is provided to all clients, and all funds are kept in segregated accounts.
Which is the Best Broker for Beginners?
IG Markets is also the best broker for beginners in the UK. IG Markets has some of the lowest fees in the industry, with spreads starting at 0.6 pips on the EUR/USD. IG Markets’ has no required minimum deposit for bank transfers and traders can access 17,000+ CFDs, including Forex, indices, commodities and shares. Beginners will also appreciate IG Markets’ world-class educational and market analysis section.
Other good options for a reliable FCA-regulated broker for beginners are:
Scroll for more details
Which Broker has the Best Demo Trading Account?
Capital.com is also the best broker for demo trading in the UK. Capital.com’s demo account never expires and is available on both MT4 and Capital.com’s own web-based trading platform (also available on iOS and Android). Capital.com’s platform offers in-depth financial analysis with over 75 technical indicators, multiple trading chart types, and extensive drawing tools. It also allows traders to toggle in and out of up to six tabs while keeping an eye on all charts and instruments. All 4000+ of Capital.com’s CFDs are available through its demo account.
Other FCA-regulated brokers with great demo accounts include:
Scroll for more details
Are Forex brokers in the UK reliable?
Yes, Forex brokers in the UK are reliable and trustworthy. The most reliable brokers in the UK are regulated by the FCA and have a history of treating traders fairly. If you are unsure about the reliability of your Forex broker, you can check our list of brokers to avoid.
How do I Choose a Forex Broker?
When choosing a Forex broker there are three things to consider:
- Regulation: Make sure you choose a broker regulated by the FCA or one of the other major regulators like CySEC (Europe) or ASIC (Australia). Regulated brokers have better security and will treat their traders fairly
- Cost: Look for a broker with a low minimum deposit and low fees. Broker fees will include the spread, commission and deposit and withdrawal fees.
- Education: If you’re a beginner you will want a broker with good educational content. All of the brokers on our Best Brokers for Beginners page have high-quality education for beginners.
How do Forex Brokers Make Money?
Some brokers (called market makers) only make money from the spread – the difference between the buying and selling price of the currency pair. These brokers will be the counterparty to any trade, so they make money when clients lose trades.
Other brokers (called ECNs) have tight spreads but make money from commissions, which are charged every time a trade is opened or closed. This type of broker makes money whether a client wins or loses.
Which Broker has the Lowest Fees?
Tickmill is the broker with the lowest fees, with the total trading cost on its Pro Account equalling 0.4 pips on the EUR/USD, this includes a 0 pip minimum spread and a round turn commission of 4 USD per 100,000 traded.
Other brokers with low trading costs are:
Scroll for more details Broker fees are split into the trading costs, which is the total of the spread and commission, and non-trading fees such as deposit and withdrawal fees.
The spread is the difference between the buy and sell price of a Forex pair and is measured in pips, the smaller or “tighter” the spread the less money you spend when you make a trade. Commission is charged by some brokers every time a trade is opened or closed.
How do I make a Deposit with a Broker?
Making a deposit with a broker is a simple process. Once you have signed up and opened a live account you will be given a few options. Most brokers in the UK will accept local bank transfers, credit cards, online payment solutions like Paypal, and eWallets like Neteller and Skrill. Bank transfers usually take 1-2 days to process and may have a fee attached but all other deposit methods are usually instant and free.
How do I make a Withdrawal from a Broker?
To make a withdrawal from a broker you must have enough money in your trading account after deducting the margin needed to keep any trades open. Once you know how much you can withdraw, you can make a withdrawal request via your account dashboard. To prevent money laundering, brokers in the UK will only allow you withdraw the same amount as your initial deposit back to your credit card or eWallet. Anything more than this will have to be withdrawn to a bank account in your name.
Which Broker has the Lowest Minimum Deposit?
Pepperstone is the FCA-regulated with the lowest minimum deposit. While Pepperstone recommends opening an account with at least £200, it recently waived deposit requirements entirely. In addition, Pepperstone charges no inactivity fees for dormant accounts, charges low withdrawals fees, and has some of the lowest trading fees in the industry.
Other FCA regulated brokers in the UK with low minimum deposits are:
Scroll for more details With most brokers, larger deposits usually unlock lower trading costs and other perks. What level of minimum deposit you are comfortable with depends on your financial situation.
How do I Calculate Trading Costs?
When trading Forex, the total trading cost is the spread on the currency pair you are trading plus any commission your broker may charge. If you keep a trade open overnight you will also be charged a rollover (or “swap”) fee, which will be deducted automatically from your account. Major pairs, such as the EUR/USD or USD/JPY have tighter spreads and are cheaper to trade.
Which Broker Has the Most CFDs?
IG Markets is the broker with the most CFDs to trade. IG Markets offers trading on over 17,000 instruments, including Forex, indices, share CFDs, commodities, cryptocurrencies, digital 100s, options, ETFs, bonds, and interest rates.
Brokers with the widest range of instruments to trade are:
Scroll for more details
Which Broker has the Most Currency Pairs?
Swissquote is the Broker with the most currency pairs, with over 130 currency crosses to trade. As part of a larger banking group, Swissquote is very well regulated and is one of the most secure brokers in the world. Swissquote targets professional traders and minimum deposits are high, starting at 1000 USD on its entry-level account.
Other Forex brokers with a larger than usual selection of currency pairs to trade are:
Scroll for more details
Which Broker is the Best for Professional Traders?
Pepperstone is the best broker for professional traders. An ECN broker with extensive liquidity streams, Pepperstone supports all three major trading platforms (MT4, MT5 and cTrader) and has some of the tightest spreads in the industry (0.09 pips EUR/USD spread on its Razor Account).
Commissions are low and there are no minimum deposit requirements. Commissions can be further reduced by becoming a member of Pepperstone’s Active Trader Program. The Active Trader Program has a number of other advantages for high-volume traders, including a free VPS service and priority customer support.
What are Managed Forex Trading Accounts?
Some brokers will operate a managed account for you, but this is rare. There are independent money managers who can manage your account while they are trading for themselves. It is vital that you read our article on managed accounts and understand the minimum deposit requirements and additional risks involved when trading CFDs.
How do I Know if a Forex Broker is Regulated?
All regulated brokers are required to display their licence number and the authority they received it from on their website. These licence numbers can be easily verified on the regulatory authority’s website. Some scam brokers will use similar names to legitimate businesses, so make sure the name of the licence holder on the regulator’s website matches the broker’s details.
How do I check if a Forex broker is licenced by the FCA?
All Forex brokers that are regulated by the FCA are required to publish their FCA licence number on their website. Once you have the licence number of a broker you can go use the FSCA’s search page to enter the FSP and verify that the broker is indeed licenced.
How Can I Report Scam brokers?
If you believe you have been scammed by your broker, the first thing to do is warn others and tell your story. You can contact the UK Financial Ombudsman here and ask them to investigate. We also have a report a scam broker form which we use to gather information so that we get the word out. If you have been scammed, please complete the form.
Which Broker has the Best Customer Support in the UK ?
FP Markets is the FCA-regulated broker with the best customer service. FP Markets customer support has won 22 awards since the company was founded in Australia in 2005. Available 24/7 (0800-1600 on weekends) via live chat, email, telephone and call-back service in over 12 languages, FP Markets’ customer support is knowledgable, responsive and can assist traders with all aspects of CFD trading, from setting up accounts to navigating its platforms, plus any other technical queries.
Which Forex Broker has the Best Platform?
Marketsx is a trading platform from Markets.com, which has been FCA-regulated since 2014. Traders can use the Marketsx platform to trade over 2,200 financial instruments. The platform also offers advanced charting, making it easier to spot trends and identify new trading opportunities. Marketsx also allows traders to use five types of indicators once, overlay multiple assets, or compare up to eight instruments side-by-side. Marketsx is available on mobile devices and via the markets.com website.
Which is the Best Platform for Forex?
Currently, MetaTrader 4 (MT4) is the best platform for trading Forex. MT4 has been around since 2005 but is supported by most Forex brokers and used by millions of traders around the world. MT4 is resource-efficient, fast, and can run on older hardware without any issue. It’s also fully customisable and can handle multiple trading accounts from different brokers with a single installation.
MT4 is particularly valued for its automated trading facilities. Traders can create or buy algorithmic trading robots and install them on their version of MT4 to automate trading or assist in decision making. It’s also possible to copy other traders through the MT4 trading signals facility.
Forex Risk Disclaimer
Trading Forex and CFDs is not suitable for all investors as it carries a high degree of risk to your capital: 75-90% of retail investors lose money trading these products.
Forex and CFD transactions involve high risk due to the following factors: Over-leveraging, unpredictable market volatility, slippage arising from a lack of liquidity, inadequate trading knowledge or experience, and a lack of regulatory protection for clients.
Traders should not deposit any money that is not disposable. Regardless of how much research you have done, or how confident you are in your trade, there is always a substantial risk of loss. (Learn more from the FCA or from ASIC)
Our Rating & Review Methodology
Our State of the Market Report and directory of CFD Brokers to Avoid are the results of extensive research on over 200 Forex brokers. The explicit goal of these resources is to help traders find the best Forex brokers – and steer them away from the worst ones – with the benefit of accurate and up-to-date information.
With over 150 data points on each broker and over 3000 hours of research and review writing, we believe we have succeeded in our goal.
In a world where trading conditions and customer support can vary based on where you live, our broker reviews focus on the local trader and give you information about these brokers from your perspective.
All research has been conducted by our in-house team of researchers and writers, gathering information from various company representatives, websites and sifting through the fine print. Learn more about how we rank brokers.
Accepts UK Clients. Average spread EUR/USD 0.77 pips with 0.0 USD commission round turn on the trading account with lowest minimum deposit. Max leverage 30:1. Islamic account available. MT4, MT5 & cTrader platforms supported. Pepperstone is regulated by the FCA, ASIC, and the DFSA. 75.8% of traders lose money with this provider.
