Introduction to FX Trading

If you've ever taken a trip outside Canada you’ve probably dealt with a currency exchange rate in some way, shape or form. But did you know you can also trade these currency differences to try to gain a profit? That's exactly what FX trading is based on.

Currencies are constantly changing and these fluctuations can be what FX traders look to make money on. Let's walk you through some of the basics and how to get started.

How FX Trading works

FX trading involves trading pairs of currencies and profiting off the price difference between them. FX trading at Questrade is for speculation purposes. This means that no physical currency is exchanged as part of the investing process. So, a trader can simply place a trade on our platform to take advantage of the changing prices between the two currencies.

For example, you might be trading British Pounds (GBP) vs. US Dollars (USD). You could believe that the British Pound will increase in value vs. the US dollar (which would lead to you going long on your FX contract), or alternatively, you might believe the opposite (leading to you having a short FX contract).

You can trade in lot sizes of 1, 0.1, and 0.01 contracts, which corresponds to 100,000 units, 10,000 units, and 1,000 units of the respective currencies in the contract.

Your profit (or loss) in a given FX contract is determined by the change in price between the two currencies over the duration of the contract, multiplied by the size of the contract.

If you want to test out FX trading for yourself, we offer a practice account version of our platform, Questrade Global, where you can learn how things work and test out your investing strategies without using your real money. The FX market is open for trading 24 hours a day, 5 days a week.

Margin and leverage - managing the risks

Margin and leverage are concepts you might already be familiar with from trading stocks - they allow a trader to invest in securities potentially worth more than the amount of available funds in their account. This can magnify any potential gain (or loss) you experience while investing.

In FX trading, you don’t borrow funds from the broker, instead your own funds are leveraged to increase your investing potential. Brokers like Questrade that allow investing in derivatives such as FX and CFDs are regulated by the Investment Industry Regulatory Organization of Canada (IIROC) and are required to follow it’s margin rules.

Leveraged FX trading can carry a high degree of risk because it allows you to invest in contracts worth more than the amount of funds you deposit to your account. This can magnify any potential profits, but there is also a risk that your losses could exceed the value of your original investment. This is why risk management is an important aspect of any FX trading strategy.

Here are a few tips to help you manage your risks while trading in foreign exchange markets:

• Know your market: The foreign exchange market can be very volatile. It’s important to learn about the different factors that can drive the volatility of the markets in which you plan to trade.
• Know your personal risk tolerance: FX trading is not suitable for risk-averse investors who want to ensure the security of their capital. It is important to understand your own appetite for risk.
• Monitor your positions: You should always be careful and diligent when monitoring your open positions. Volatile market conditions can quickly impact the value of your contracts and your overall account size. Be sure to adjust your position sizes accordingly.
• Keep on top of your leverage: Seasoned traders generally advocate lower leverage in trading. The more leverage you have available (and unused) in your account, the lower the chance you have of having a margin call if the market moves in an unexpected way.
• Utilize stop loss and take profit orders: These are order types that can be attached to your positions to limit the downside risk and lock in profits without having to manually enter the trade. Please note these order types can be used to limit losses and lock in profits but are not fully guaranteed to be triggered at the specified price.

Want to learn more?

The world of FX trading, rather like the world itself, is quite big and varied, but we have a few resources to help get you started on your learning journey.

To learn more about the fees associated with trading FX at Questrade, you can visit our fees page.

We strongly recommend opening and using a practice account to learn more about the advantages and disadvantages of FX trading before using your own money in a live account.

If you have any other questions about FX Trading, you can contact us - we’ll be happy to help. Once you open and fund an FX trading account you will get access to complimentary training sessions helping you to learn how to trade FX within our platform.