Currency Spread Betting Tips and Strategies

Currency Trading Tips

  1. There are seven major world currencies. Apart from sterling (GBP), these consist of the US dollar (USD), the euro (EUR), the Japanese yen (JPY), the Swiss franc (CHF), the Canadian dollar (CAD) and the Australian dollar (AUD). To start with only spread bet one or two currency pairs as each pair exhibits different characteristics. The GBP/USD and USD/CHF currency pair tend to show similar characteristics so if you trade one of these pairs you are likely to like trading the other pair as well.
  2. Commonly traded currency pairs are referred to as the majors and consist of the following pairs: EUR/USD, USD/JPY, GBP/USD, USD/CAD, UDS/CHF and the AUD/USD. The most commonly-traded currency pair by far is the EUR/USD (sometimes this pair is referred to as the 'euro' or the 'euro dollar') and since it has the most liquidity spreads are usually very tight.
  3. The GBP/USD currency pair is also referred to as the 'cable' or 'the sterling' while the USD/CHF is sometimes referred to as 'the swissy'. The Swiss franc (usually denoted as CHF) in particular is often regarded as a safe haven currency; in other words traders will buy it against other currencies during turbulent market times, when investors are becoming less lenient with risk. This is so because Switzerland as a country is regarded as politically stable and fiscally prudent.
  4. More currency terminology. To sound like a 'professional' when trading FX, be aware of the following currency nicknames:
    • Aussie: Nickname for the Australian dollar.
    • Cable: Refers to GBP/USD and so called after the Transatlantic Cable laid under the Atlantic Ocean in 1858 to telegraphically link the UK and the US.
    • Greenback: Nickname for the United States dollar.
    • Kiwi: Nickname for the New Zealand dollar.
    • Loonie (or little dollar): Nickname for the Canadian dollar.
    • Pip: Stands for Percentage in Point and the smallest increment of trade (i.e. you trade per 0.0001 movement on all but the USD/JPY when trading with Spreadex).
    • Swissie: Nickname for the Swiss franc.
  5. Some commonly traded currencies like the Australian, Canadian and New Zealand dollars are sensitive to commodity prices but for other currencies interest rates are far more important. If you can predict interest rates correctly you can predict forex. The Norwegian krona is another currency affected by the oil price, as Norway is a big oil/gas exporter.
  6. Trends tend to persist longer in Forex - for instance the weakness in the US dollar has persisted for many years. When spread betting on stock prices, you are typically evaluating a company's balance sheet, its results and the quality of its management. When spread betting forex pairs, you are focusing on countries' economies, including how much money governments are borrowing and spending, and what their interest rates are.
  7. The forex market is massive, highly liquid and highly responsive to events. Forex moves are caused by interest rates, fundamentals and technicals. This is why many traders pay very close attention to statements made by central banks. For instance if the Bank of England reduces the base rate, sterling becomes less attractive to investors. So money may move out of the UK currency and into something else, pulling down the GBP/USD forex pair rate in the process. But big moves in a currency can also trigger central banks to intervene (doesn't happen with other markets such as stocks or commodities). For instance when the USA released a report showing a good number of home sales, this improved the market sentiment for the American economy and helped prop up the dollar. Other drivers of forex rates include debt, inflation forecasts, the relative strength of the economies within the pair (unemployment, inflation figures..etc) and balances of trade. Central bank interventions create artificial volatility that would easily see 500-point movements in the space of hours making forex trading more dangerous during these periods. A solution here is to tighten stops and profit targets during these periods or to use guaranteed stops to reduce the risk.
  8. As with other financial markets made available by spread betting provider, forex currency pairs have spreads and different margin rates - the narrower spreads are usually for the more liquid forex pairs i.e. those that are bought and sold in big volumes globally, also known as the currency majors. These include the US dollar, the world's de facto reserve currency, as well as the euro, the Japanese yen, and the British pound.
  9. Note that some pairs are more volatile than others. This is especially so for the exotic currency pairs which are less liquid than the majors and thus prone to much wilder swings. Some exotic pairs also have significantly wider spreads compared to the majors which makes it more expensive to deal in these markets. If you are starting out it is usually best to trade single pair and learn everything about that pair (don't trade too many pairs at once). I started out trading the EUR/USD. If you want more volatility: GBP/USD. If you want less volatility: USD/JPY.
  10. Liquidity for most forex pairs is optimal from 8am to 8pm (UK time) Monday through Friday, especially during the first hours of the London-New York markets overlap when the bulk of market participants are operating. This is also when prices tend to make their biggest movements (and trend most) making it very easy to trade. The London session is in fact one of the best times you can be trading since between 8am and 12 (UK time) you don't have to deal with any big economic data releases coming out of the USA and you only need to pay attention to the occasional UK or European news releases. This in turn means that you can concentrate fully on technical analysis without any distractions. It is interesting to note that the Asian trading session tends to be a lot less volatile than the New York trading session for most major forex pairs which means that trading setups are likely to materialise more slowly.
  11. Try to avoid trading on around non-farm payroll day (the first Friday of each month), unemployment figures day or on manufacturing data numbers. This is when the least liquidity and biggest moves often occur at the same time. Huge spikes can take place during these times so trading during these periods is more akin to gambling. Of course if you're trading intra-day the story is different as news announcements are crucial to trade that momentum. For instance if you wanted to put on a short-term play you could watch a 15-minute price bar chart before the news announcement is made and place an order on either side of the bar's high and low. In this case you are basically saying that if it breaks the high you will buy it and put a stop at the low. If it breaks the low you will sell and put a buy on the top side - but you really have to be quick to close the other order off...
  12. With the decimation of many traditional buy and hold investors, persisting market volatility and poor or no returns from cash or treasury bonds many traders and investors are looking at alternative markets, such as the forex market. Be warned though that although the spot or over-the-counter forex trading is growing exponentially it is still largely an unregulated market. Secondly, the skills required for trading (and investing) in this market are different to those in the equity market - I would say they are more akin to those used in poker. In addition forex trading requires an understanding of probability as well as well as very tight money and risk management rules. The forex market can be quite a beast that is inherently difficult to understand with too much information, wrong and hidden or obscure information...
  13. Most novice forex traders on average end up losing their money twice before finding a system which works for them. Reasons for failure include a poor understanding of the market and its participants, the particular requirements of the forex market in terms of margin and leverage and the absence of a plan. Be wary for instance that many currency pairs can move in excess of 100 points in a day so do consider this when taking into account stake size and placement of stop loss levels.
  14. Most people take spread bet positions over days or weeks but there is no reason why you can't use them to speculate on a currency's direction over several months - simply bet on the longer-dated futures bets expiring in three months' time. If you still wish to keep the bet running after the three months have elapsed, simply roll it into another spread bet for the next quarter. The timeframe, investment and leverage are all correlated, you can opt for higher leverage for short-term trades and vice-versa.

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