Spread Betting on Foreign Exchange

The currency trading market is the largest and most liquid trading market in the world with average daily turnover estimated at $3.98 trillion, according to the Bank for International Settlements. The currency trading market - also known as foreign exchange, FOREX or FX - was once closed to individual speculators, reserved only for global banks or multi-national corporations. However, with spread betting providers like Spreadex you can gain access to trade on a wide range of currency pairs with a low initial capital outlay.

It is interesting to note that currently forex spread betting makes up more than 50% of ETX Capital's web business (according to Rob Woolfe, head of Forex at UK spread-betting firm ETX Capital). For Capital Spreads this figure is closer to 30%. Most spreadbets on forex pairs are closed within minutes or hours with short-term traders relying more on technical analysis than fundamentals. According to Simon from Capital Spreads, the most commonly traded spread betting forex pairs are euro/dollar and 'cable,' or sterling/dollar.

Brokers say one of the drivers behind the rapid growth of spread betting on foreign exchange is that it is far more accessible than the real thing. To trade foreign exchange from the UK you have to prove that you have had six months' experience of doing it, making it virtually impenetrable for the novice. But you do not need any experience to open a spread betting account.

David Jones, chief market analyst, at CMC Markets UK, explains: 'There really is very little benefit to an average private trader in using margined FX over and above spread betting. On the margined FX account we offer a few more exotic currencies and if your trade is bigger than $1 million you have slightly more generous margin requirements, that is - you have to put up less money. But I think it would be fair to say many active FX clients have switched to spread betting FX as the spreads have come down. Spread betting on the forex is incredibly popular for retail clients.'

Another advantage of spread betting over real foreign exchange trading is that you can do it in your local currency. 'Foreign exchange trading is mainly done in dollars but if you have a pound sterling account you really want to win or lose in pounds,' says Mr Denham of Capital Spreads.

Currencies also tend to be very volatile which traders like (a busy trading session can result in up to 200pts movement). Also, foreign exchange spread betting provides you the opportunity to leverage more than betting on assets such as equities. ETX Capital says a typical bet on foreign exchange is 15 times leveraged - betting 15 times as much as the original stake - against about 10 times on stocks. "This is the case as currencies are less likely to default or go bankrupt," says Mr Denham. What's more, the range of currency pairs available through spread betting firms vastly outnumbers the narrow selection you'd get at a currency broker - IG Index for instance offers more than 60 currency pairs.

To succeed in spread betting on foreign exchange, many short-term traders use technical analysis such as pivot points. These are the support or resistance levels at which the movement of a currency is likely to reverse. The support level is the point at which the currency is unlikely to drop further, and the resistance level is the point it is unlikely to exceed. These are garnered from past highs and lows of that currency against others.

For example, there could be heavy support for the dollar-euro at 1.2830 that is, the EURO is seen as unlikely to fall lower than $1.2830 and heavy resistance at the other end at $1.3020.

Manoj Ladwa, derivatives broker at ETX Capital says that currencies generally follow fairly predictable trends. "When a currency is moving in one direction it often holds that trend for a sustained period before it reverses. Stocks are a lot more random," he says.

There is a wealth of background information, research tools and analytical techniques for would-be currency traders. Basic technical chart packages, which use different formulas to help predict currency movements, are generally available from spread betting companies and stockbrokers.

Common ones are Bollinger bands, which calculate expected highs and lows, and Fibonacci numbers, which use number sequences to isolate likely market turning points.

It is interesting to note that most short-term traders aren't that much interested in fundamentals as these have a tendency to take long to affect an underlying market. But betters should also keep a close eye on economic news, such as unexpected interest rate movements, as these can have a significant impact. Of course, fundamental analysis is very much more important to longer term currency traders as it is the fundamentals that direct markets and set trends in the long run.

On a departing not it is widely regarded that Capital Spreads offers some of the best prices and services for pure currency spread betting.


Forex Currency Trading Versus Spread Betting
Forex Currency Trading Spread Betting
Currencies: British pound (GBP) and US dollar (USD). Currencies: British pound (GBP) and US dollar (USD).
Spread quoted by forex broker: 1.6112/1.6116.

Spread quoted by spread betting firm: 1.6112/1.6116.

This means the forex broker believes the number of dollars in every pound (exchange rate) will be between 1.6112 and 1.6116. This is the spread. This means the spread betting firm believes the number of dollars in every pound (exchange rate) will be between 1.6112 and 1.6116.
Margin (deposit): £2000 1 point = 0.00001
Leverage: 50:1 You buy at 1.6116 (the higher number) and sell at 1.6112 (the lower number).
Size of trade: £2000 x 50 = £100,000  
Buy example (going long) Buy example (going long)
You think the pound will strengthen against the dollar (perhaps you think the US is about to announce bad trading results). You think the pound will strengthen against the dollar.
You buy at 1.6116. You bet - or buy - £1 for every point at 1.6116.
You were right - Profit: The rate rises - the broker is now quoting a spread of 1.6150/1.6154. You were right - Profit: The rate rises - the spread betting firm is now quoting a spread of 1.6150/1.6154.
You sell at 1.6150 - 0.0034 higher. You sell at 1.6150 - 0.0034 or 340 points higher than the rate you bought at (1.6116).
Your profit is £100,000 x 0.0034 = £340 (before CGT and any commission). You win 340 x £1 = £340 (tax-free).
You were wrong - Loss: The rate decreases, and the broker is now quoting a spread of 1.6050/1.6054. You were wrong: Loss - The rate decreases, and the spread betting firm is now quoting a spread of 1.6050/1.6054.
You sell at 1.6050 - 0.0066 lower. You sell at 1.6050 - 0.0066, or 660 points lower than the rate you bought at (1.6116).
Unless you have a stop-loss order in place, your loss is £100,000 x 0.0066 = £660 (before any commission). You lose 660 x £1 = £660.
Losses can be minimized by using a stop-loss order, which many brokers recommend and often insist on.  
Sell example (going short) Sell example (going short)
You think the pound will weaken against the dollar (perhaps you think the UK is about to announce bad trading results). You think the pound will weaken against the dollar.
You sell 1.6112. You bet - or sell - £1 for every point at 1.6112.
You were right - Profit: The rate decreases and the broker is now quoting a spread of 1.6050/1.6054. You were right - Profit: The rate decreases and the spread betting firm is now quoting a spread of 1.6050/1.6054.
You buy at 1.6054 - 0.0058 lower. You buy at 1.6054 - 0.0058, or 580 points lower than the rate you sold at (1.6112).
Your profit is £100,000 x 0.0058 = £580 (before CGT and any commission). You win 580 x £1 = £580 (tax-free).
You were wrong - Loss: The rate rises - the broker is now quoting a spread of 1.6150/1.6154. You were wrong - Loss: The rate rises and the spread betting firm is now quoting a spread of 1.6150/1.6154.
You buy at 1.6154 - 0.0042 higher. You buy at 1.6154 - 0.0042 or 420 points higher than the rate you sold at (1.6112).
Unless you have a stop-loss order in place, your loss is £100,000 x 0.0042 = £420 (before any commission). You lose 420 x £1 = £420.

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