Currency Indices

A forex index give an objective view of a currency’s international value by comparing it to several of its peers. Because the index is formed of multiple currencies, a significant rise or fall in one currency is balanced out by the remaining constituents. This guide to trading currency indices explains how they work, including their benefits and limitations. We also list the best brokers for trading forex indices.

Forex Index Brokers

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    AvaTrade is a leading forex and CFD broker, established in 2006 and regulated across 9 jurisdictions. Over 400,000 users have signed up with the broker which processes over 2 million trades each month. The firm offers multiple trading platforms, including MT4, MT5, and a proprietary WebTrader. 1250+ financial instruments are available for trading, alongside a comprehensive education center and multilingual customer support.

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    Established in 1989, CMC Markets is a respected broker listed on the London Stock Exchange and authorized by several tier-one regulators, including the FCA, ASIC and CIRO. More than 1 million traders from around the world have signed up with the multi-award winning brokerage.

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    Eightcap is an award-winning, FCA-regulated broker offering industry-low trading fees. They are also the highest-rated brand by TradingView’s 50 million-strong users, who can trade directly on the platform. UK traders can sign up for a live account with an accessible £100 minimum deposit.

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    Established in Australia in 2010, Pepperstone is a top-rated forex and CFD broker with over 400,000 clients worldwide. It offers access to 1,300+ instruments on leading platforms MT4, MT5, cTrader and TradingView, maintaining low, transparent fees. Pepperstone is also regulated by trusted authorities like the FCA, ASIC, and CySEC, ensuring a secure environment for traders at all levels.

  5. XM

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    XM is a globally recognized forex and CFD broker with 10+ million clients in 190+ countries. Since 2009, this trusted broker has been known for its low fees on 1000+ instruments. XM is regulated by multiple financial bodies, including the ASIC and CySEC.

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    City Index is an established and award-winning forex, CFD and spread betting broker with top-tier global regulation, including in the UK (FCA) and Australia (ASIC). With 30+ years in the industry, 13,500+ instruments and 24/5 customer support, City Index is a solid pick for aspiring traders.

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    DNA Markets is a forex and CFD broker established in 2020. The broker operates two entities in Australia and the offshore jurisdiction, St Vincent and the Grenadines. Traders can access 250+ markets, with a Standard account for beginners and a Raw account for experienced traders. The reliable MetaTrader 4 and MetaTrader 5 platforms are available, alongside Signal Start.

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    eToro is a top-rated multi-asset platform which offers trading services in thousands of CFDs, stocks and cryptoassets. Launched in 2007, the brand has millions of active traders globally and is authorized by tier one regulators, including the FCA and CySEC. The brand is particularly popular for its comprehensive social trading platform. Cryptoasset investing is highly volatile and unregulated in the UK and some EU countries. No consumer protection. Tax on profits may apply. 76% of retail CFD accounts lose money.

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    InstaForex is a forex and CFD broker founded in 2007. The broker offers diverse market coverage to over 7 million clients, spanning traditional assets like currencies and shares, as well as other interesting opportunities such as IPOs. Traders can also access copy trading services, PAMM accounts and investment opportunities. InstaForex is regulated by the BVI FSC.

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    Founded in 2009, Vantage offers trading on 1000+ short-term CFD products to over 900,000 clients. You can trade Forex CFDs from 0.0 pips on the RAW account through TradingView, MT4 or MT5. Vantage is ASIC-regulated and client funds are segregated. Copy traders will also appreciate the range of social trading tools.

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    Founded in 2006, FxPro is an established forex, CFD and spread betting broker offering 2100+ assets to over 2 million clients worldwide. The broker is regulated in 4 jurisdictions and offers reliable 24/5 customer support, earning it a high trust and safety score. FxPro has also picked up more than 100 industry accolades for its competitive trading conditions, including fast execution and deep liquidity.

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    Founded in 1974, IG is part of IG Group Holdings Plc, a publicly traded (LSE: IGG) brokerage. The brand offers spread betting, CFD and forex trading across an almost unrivalled selection of 17,000+ markets, with a range of user-friendly platforms and investing apps. For 50 years, IG has maintained its position as an industry leader, excelling in all key areas for traders.

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    FXCM is a respected forex and CFD broker, established since 1999. The British-headquartered broker has won multiple awards and operates in various jurisdictions, including the UK and Australia. With zero commissions, over 400 assets, and a range of analysis tools, FXCM remains a popular choice for traders. The broker is also regulated by top-tier authorities including the FCA and ASIC.

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    FXTM is a top-rated forex and CFD broker established in 2011 and operating across 4 continents. The company is secure and regulated by leading authorities, including the FCA and CySEC. Offering 1000+ trading markets and three account types, they cater to all levels of trader.

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    FP Markets is an ASIC- and CySEC-regulated broker that offers forex and CFD trading on a broad range of assets through the MT4, MT5 and IRESS platforms. With trading available through standard and raw spread accounts on thousands of international stocks, forex, indices, commodities, cryptocurrencies, bonds and ETFs, this broker has some of the most comprehensive market coverage available. FP Markets also offers a full range of additional features, including educational resources and access to powerful software such as Autochartist.

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    Libertex is a well-known broker, established in 2012. The regulated brand has served numerous clients and is regulated by the Cyprus Securities and Exchange Commission with license number 164/12. Libertex offers CFD trading on 250+ underlying assets, including through an innovative and user-friendly proprietary web trader platform. Choose between CFDs on forex, cryptocurrencies, commodities, stocks, indices and ETFs, which are available with tight spreads and low commissions.

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    Admirals is an FCA- and ASIC-regulated broker with an excellent range of leveraged instruments, including forex, stocks, indices, ETFs, commodities, cryptos and more. The broker supports the MetaTrader 4, MetaTrader 5 and TradingCentral platforms. With both spread betting and CFDs available and thousands of instruments, this broker provides more flexibility than most rivals.

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    Infinox is a UK-based and FCA-regulated broker that offers diverse trading products thanks to its STP and ECN account types and support for MetaTrader 4, MetaTrader 5 and a proprietary platform. Clients can also benefit from a free VPS that can support automated strategies and a social trading platform, catering to both beginner and seasoned traders.

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    OspreyFX is an ECN broker headquartered in St. Vincent and the Grenadines. Established in 2019, the firm offers 120+ forex and CFD assets with high leverage up to 1:500, tight spreads from 0.1 pips and round-the-clock customer support. OspreyFX also stands out for its funded trading accounts where traders can keep up to 70% of profits.

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    Trading 212 is a European and UK-regulated CFD broker that also offers stock investing and ISAs. It’s best known for its commission-free trading model and beginner-friendly app, which has helped it attract 2.5 million users and £3.5 billion in client assets.

What Is A Currency Index?

A currency index is a way to measure the performance of a single currency by comparing it to a basket of similar currencies. For example, the British Pound Index assesses the strength of the GBP against the currencies of its key trading partners, including the Euro, US Dollar, Japanese Yen, and Swiss Franc.

By measuring a base currency against several others, the forex index gives a more holistic view of its performance than you would get from a single currency pair as extremes are balanced out.

This makes currency indices a useful way to gauge a country’s overall economic performance; when an index rises, the country is usually performing strongly and vice versa.

Generally, only major currencies have forex indices that can be easily traded. The most common currency indices you can find for online trading are the US Dollar, Pound Sterling, Euro, and Japanese Yen.

The most popular way for retail investors to trade forex indices is through CFDs, allowing users to go long or short with leverage.

How Do Currency Indices Work?

Currency indices can be calculated in various ways, but the most common approach is to measure them against the currencies of a country’s main trading partners, weighted according to each partner’s proportion of the country’s total trade volume.

The Bank of England uses this kind of trade-weighted index for the UK currency. The British Pound Index includes all trading partners whose share of UK exports or imports for the last three years are on average above 1%.

The US is the single largest country on the index with a weighting of around 20%, followed by China with a weighting of around 12%. But the UK’s largest trading partner is the EU, and the Euro is weighted at around 42%.

Importantly, forex index brokers often use their own formulae. As a result, the exact currencies and weightings may differ somewhat between trading platforms. For example, the weighting for the GBP Index at CMC Markets can be seen below.

British Pound Index at CMC Markets

CMC Markets – GBP Index Weighting

Benefits Of Trading Currency Indices

  • Gives an overall view of a currency’s performance, including the GBP, USD and EUR
  • Balances out extreme price movements that can arise when trading currency pairs
  • Opportunity to go long or short with derivatives like CFDs
  • Can be used for hedging and portfolio diversification
  • Trading available 24/5

Risks Of Trading Currency Indices

  • Complex products with many factors that influence each currency’s value, making it hard to predict future trends
  • Vulnerable to unforeseen events that can badly affect a country’s economy
  • Some traders prefer the higher volatility found in trading currency pairs
  • Best time to trade different forex indices varies

How To Trade Forex Indices

The most popular investment vehicles available to UK traders are:

  • CFDs – A contract for difference, or ‘CFD’, is a derivative where the trader’s profit or loss equals the difference in the underlying asset’s price at contract open and at contract close. Open a long position on a CFD if you believe the forex index’s value will rise or a short position if you think it will fall. CFDs can also be traded with leverage; for example, Pepperstone offers forex index trading with leverage up to 1:5.
  • Futures – A future is a derivative contract in which the counterparties agree to complete a trade for an underlying asset at an agreed price at a predetermined time in the future. The profit or loss from this trade is determined by the difference between the agreed price and the market value of the asset when the contract expires.
  • Options – An options contract gives investors the right but no obligation to complete a trade on an underlying asset at an agreed time in the future. The key difference between this and a futures contract is that you don’t need to complete the trade, meaning that if the trade goes against you, your losses will be limited to the premium paid for the options contract.
  • ETFs – You can also trade currency indices as part of an ETF (exchange-traded fund), for example, the Invesco DB US Dollar Index Bullish Fund. ETFs can be used as a hedging tool.

Comparing Brokers With Forex Indices

  • Fees – Most fees usually come from bid-ask spreads and/or commissions. For CMC Markets, the spreads on currency indices vary depending on the currency you choose; the USD index is the tightest with spreads from 0.25 pts whereas the JPY index has spreads from 5 pts. You also need to account for any swaps fees for positions held overnight, deposit and withdrawal charges and inactivity costs.
  • Index List – Before registration, check which currency indices are available with a broker and the instruments you can use to trade them. Pepperstone, for example, offers CFD trading on three different currency indices.
  • Trading Platform – The trading platform is the application used for everything from technical and fundamental analysis to executing trades. FXTM is one of several leading forex index trading brokers that support multiple high-quality platforms, including MetaTrader 4 and MetaTrader 5. Some brands will also offer their own proprietary platforms.
  • Regulation – Brokers with currency indices that are licensed by the UK’s Financial Conduct Authority or other reputable regulators must adhere to rules that protect clients. Negative balance protection is one example of this that stops clients from becoming indebted to their brokers due to a bad trade.
  • Support Desk – The best forex index brokers make it easy to seek help by offering contact methods such as live chat on the website or by calling up a phone hotline. Pepperstone, for example, is contactable 24 hours a day, Monday to Friday.
  • Demo Account – Several brokers such as AvaTrade offer free demo accounts. These are excellent ways to test out forex index trading strategies under real market conditions or to build up experience with a new platform.

Trading Strategy

Popular approaches to trading currency indices include:

  • Technical Analysis – This involves the use of indicators and charting tools on a platform. Useful indicators for trading forex indices include the relative strength index, stochastic oscillator and moving averages. Technical analysis involves predicting upcoming price-action and opening positions by analysing past market movements. This is most often used in short-term trading strategies such as trend-following or trend reversals.
  • Fundamental Analysis – This relies on news and knowledge of economic indicators for a currency’s intrinsic value. You can analyse a country’s economy to support predictions for future price action. News to be aware of includes economic projections and announcements such as inflation and central bank rates hikes, political events such as changes in government and natural disasters and crises. An economic calendar with key dates can help you can stay informed of upcoming events.

Trading Hours

The trading hours for each index will depend on the broker and currency index. For example, the US Dollar Index CFD at CMC Markets can be traded between midnight and 10pm (GMT) Monday to Friday.

However, futures on the US Dollar Index via the Intercontinental Exchange (ICE) are available from 6pm on a Sunday until 10pm the following Thursday with breaks between 10pm and 1am every day.

Bottom Line On Forex Index Trading

Through currency indices, investors have a different way of trading the forex market by evaluating the overall strength of a currency. The best forex index brokers offer several leading currencies, including the British Pound Index and the US Dollar Index.

FAQ

What Is An Index In Forex Trading?

A currency index is a group of forex pairs that measure the strength of a single base currency. For example, the Bank of England’s Pound Sterling Index weighs GBP against the currencies of the UK’s largest trading partners, including the US, Europe, and China.

What Is The Difference Between Trading Forex And Forex Indices?

Forex trading involves making investments in single pairs, such as EUR/USD or GBP/USD. Forex index trading involves a single currency’s performance, which is measured by weighing it against several relevant currencies at once. Importantly, forex pairs are more volatile.

Is Trading Currency Indices Better Than Forex Pairs?

Currency pairs and indices are similar in many ways, though pairs tend to be more volatile. A forex index will give a more objective and stable view of a currency’s overall performance, but you are likely to find more products and brokers to invest in popular currency pairs.

How Do You Use The US Dollar Index To Trade Forex?

The US Dollar Index is a useful measure of the overall strength of the USD. It can be used as a helpful indicator of how the currency compares on the world stage against other major currencies such as the Euro and Chinese Yuan. It can also serve as the basis for derivative products such as CFDs.

Article Sources

CMC Markets Currency Indices

FXTM Currency Indices

Trade Weighted Sterling Index