How to Spread Bet Currencies and Forex Pairs

Q. How do you use spread betting to trade currencies?


A: The simple thing to remember when trading a currency pair is that if you expect a first named currency to appreciate in value against a second named currency pair you would 'buy' a spread bet on that pair. If you expected a first named currency to depreciate in value against a second named currency pair you would 'sell' a spread bet on that pair.

For example, if you expect the pound to gain against the dollar you would 'buy' GBP/USD, which may mean you placing a £5 buy on a spread betting provider's quote of 1.5650-1.5653 (so you would buy at 1.5653). If you expect the pound to fall against the dollar you would 'sell' GBP/USD at 1.5650 in the above example. Remember also that the spread is based on movements per 0.0001 of the currency (with the exception of USD/JPY which is traded per 0.01 currency movement). Given that currency movements can be very volatile this can result in potentially huge swings meaning large profits, or alternatively large losses. So ensure you have stops in place to limit your downside to any trade.

Let's assume that you are spread betting with Spreadex. With Spreadex you will need 100 x your stake size as available trading balance to cover the potential volatility. So, based on the £5 stake size example above, you would need £515 available trading balance to place the trade (100 x your £5 stake plus £15 to cover the spread (3 pips x £5)).

There are two forms of currency spread betting: The first is the value of a currency on a future date, and the second is a daily rate spread also known as a 'on the spot' rate which is intended for very short-term trading. The spread price for a daily rate currency is much lower that a future date price i.e. spot prices are tighter (giving you greater value in your spread bet), however if you wanted to keep a spot currency trade open for longer than a day you would incur a rollover charge. For instance, at the time of writing, the financial bookmaker will quote a 24 point spread as opposed to a 40 point spread for future rates. You would also need to make sure you had your trade preferences set for your spot currency to roll. Future currency spreads are wider, but you would not incur a rollover charge if you wanted to keep the trade open for a long period of time. If you imminently expect a big move in the markets, then a daily rate is best. But I must stress that it has to be a big move. Even a move of 24 points in a day is fairly uncommon but a 40 points plus movement over say a couple of months is much more likely.

Many currency traders use technical indicators to gauge whether a given currency is likely to rise or fall against another currency. You can use charting software to draw support and resistance lines on different pairings to work out your trading strategy. Among the different signals traders look out for are Continuation Patterns and Reversal Patterns. Continuation Patterns give indications of whether a trend has the capacity to continue its current levels of momentum. Typical examples of Continuation Patterns involve the formation of Pennants, Flags, Wedges and Triangles. Reversal Patterns give indications on the likelihood of a trend reversing. Typically this will involve the formation of Double Tops and Double Bottoms, Triple Tops and Triple Bottoms and Head and Shoulders Tops and Head and Shoulders Bottoms.

Currency trading can also be used as a hedging tool, for example, for a forthcoming holiday. For example, you had booked a family holiday to the States for later in the year and expected the pound to lose ground against the dollar. Rather than changing money now and tying up capital, you could instead place a 'sell' spread bet on GBP/USD. Therefore any fall in value of the pound against the dollar in the intervening time period you would offest by the profit gained from your 'sell' spread bet.

More information on using spread betting to trade currencies is available spread betting currencies section

Q. Yes, but isn't spread betting considering gambling while forex is trading?

A: Yes, but financial spread betting was born out of existing tradeable instruments in the stock market. In a simplistic way...think about the inter-bank market. Some saw an opportunity to create leverage and create spot forex brokerages opening it up to the retail market, to people who would never have been able to trade Forex. Many years later another opportunity was seen to create spread betting in the United Kingdom but covered under a different section of law and therefore tax free perhaps providing different incentives to the retail client and also different taxable arrangements taxing the provider from their profits.

In particulr forex accounts are subject to capital gains tax in the United Kingdom and Ireland as you're buying and selling currency and this classified as investing. Financial spread betting is different as you are not actually purchasing / selling the currency instruments but placing a bet on their movements with a spread betting provider and these wagers would have to be in a different type of account. The fact that your forex provider may hedge your position in the underlying market doesn't matter. This is how they get spread betting classified as gambling and why it's tax free as a result.

So in essence forex in the traditional sense and forex spread betting are basically different products offering the same means to an end. Those financial spread betting providers provide exactly the same charting applications, indicators, and financial products as direct access brokers.

Q. Why would anyone in the UK trade forex when they can spread bet instead?

A: Because you want to tell your friends you're a 'trader' not a 'gambler'

Jokes aside this can partly be attributed to broker leverage (although it is less of an issue these days). For many new traders, who are starting with a small pot, there isn't the flexibility you can get with the normal forex market makers. For example, if your method calls for a 100-pip stop and the smallest position size available to you is .50p (standard with most spread betting firms) then you need a fund of at least £5000 to arrive at a 1% risk profile. Thus, the main reason is probably the minimum bet value.

One thing to scrutinise is the spread. The spread will ultimately mash you in this game if you are only going for 20 pip targets. It is a tough game to beat when you have a spread of 2 or 3 pips and you are not swing trading. Let's say you trade a 2 pip spread on cable and your target is 20 (not mentioning the people who only target 5-10pips) - that is an effective commission charge of 10%! Really to make a living off this, the effective commissions need to be more like 1-2% This is relative to your total pips, i.e. 2 pips paid in spread/commission relative to a 100-200pips target isn't bad but that's swing trading. I'm sure you can get by on a bit more but it's a serious factor to overcome when scalping if you start off every trade at -2. Think about futures trading in bonds or the indexes and then you pay a small $5 commission and you can use limit orders meaning you start at 0 - that's a whole extra 2 pips EVERY trade you take - that adds up in the long run.

Of course, for scalpers the smallest possible spread would be the major factor in the choice of trade execution partner. So for scalping you really have to try to find the lowest spread fact if you are scalping don't trade FX at all, trade futures where you can use limit orders to effectively do away with the spread. Don't get me wrong, I love Forex but when it comes to commissions, futures trading can be cheaper and easier to control the win ratio / spread factors - it's not for everyone though.

The lowest spread is absolutely crucial -:
Let's say you trade at around $10 per pip.
That's $20 you give up on every trade (2 pip spread).
5 trades a week = $100.
Let's say there are 48 trading weeks in the year = $4800.
Find a provider where you can reduce that spread to 1 and you immediately make an extra $2400 a year.
Anyway, you get the point...
2 pips for 50 pips target might also be ok...I don't have the stats to back this up but it's pretty clear to me that anything above 5% is a big disadvantage to your win ratio. Swing trading 100pips + go for financial spread betting and if you see anything different from the spot price, complain - they have to give you a trade correction.

Another problem is that some spread betting firms have a system whereby each trade is actually closed overnight and re-opened at a new price. The spread is applied with each new trade, so, on trades that need be to held for days through any sort of drawdown, it's theoretically possible to find your account's real balance being eroded by a series of daily losses.

Having said that most UK forex traders stick to spread betting due to the tax free medium aspect and the ability to bet on stock exchanges, shares, energy markets, precious metals, etc. Because as far as pricing and execution, there is no real difference. For instance at FXCM both the spreadbet account and regular micro/standard account use the same NDD forex execution. In addition spread betting is far simpler and easier to learn (demo and real) as it's pretty straight forward.

Q. Just realised that spread betting companies don't use all the digits. For EUR/USD Tradefair uses 4 decimal places instead of 5 for a broker. So is it better to go with a broker?

A: More important to have a look at the information sheet or similar for each product. On Finspreads as an example, it states 'Bet per': for the Dow, 'Bet per' is 1, so a long of £1 per pt at 11,000 is equivalent to a position of £11,000: for GBP/USD Rolling, their 'Bet per' is per 0.0001, so going long at current price of 1.4933 at £1 per 0.0001 equates to a position of £14,933.

Of course, we've all got these things wrong at some time and ended up with a position ten times too large (or small).

 ...Continues here - Currency Spread Betting more Risky?

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