The Forex markets or other names it is known by, such as; Currency, FX or the Foreign Exchange Markets have existed since one country or region started exchanging goods or services with each other. Once the goods were exchanged for the currency of the local economy, the merchant needed a way to convert it back into there local currency. Thus, the beginning of the Forex markets.
To claim that technology has changed forex trading would be a huge understatement. It was only about 15 years ago that forex trading was the sole domain of big players and institutions, where $100 million was the minimum to even be able to access the market. As financial barriers to entry lowered, technology also began to create a new force in the forex market: retail forex trading. While it started in the second half of the 1990's, it was not until the early 2000s that sophisticated trading platforms were developed that made these markets accessible to a wider trading base, with the biggest breakthrough coming with the 2002 introduction of MetaQuote's MetaTrader platform. As such, automated trading was brought to the retail sector. With the release of MetaTrader 4 in 2005, an increasing portion of the market moved to e-transactions requiring less need for dealers and human participation. This was the real birth of the retail market and the cutting edge of major changes in the forex market at the hands of technology.
Speculating on currency movement involves buying or selling one currency against another in the expectation that the exchange rate will change in your favour. Both currency trading and spread betting are leveraged high-risk products so in this context they share quite a few similarities.
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The forex market is the largest in the world is open around the clock. It has no central exchange and is the most competitively priced. Recent data on turnover in traditional foreign exchange markets highlights an important feature in the evolution of the foreign exchange market. The average daily turnover had grown by an unprecedented 69% or $3.2 trillion between April 2004 and 2008 with about $110 billion of this making up the retail forex market, which indicates very high growth. Thus, in such cases, there is a tremendous opportunity to make significant profits provided you are diligent and don't rush in, because when you have high volumes there is also extreme volatility which can go for you or against you. The key here is to manage risks. The value of a particular currency can and will go up and down throughout a day based on many factors.
Every currency traded in the financial markets is represented by a three letter code. For instance, sterling is usually quoted as GBP, while the USA dollar is displayed as USD. Keep in mind that currencies are always traded in pairs (for instance one might sell US dollars and buy Euros or vice versa). So for instance if you noted GBP/USD on your spread betting trading platform, the price next to it would represent the number of US dollars that could be bought with one pound. If you then went long GBP/USD, you would be hoping to profit from a rise in the pound. If you sold it, you would be backing the dollar to rise against the pound (the number would go down as less dollars would be needed to buy a pound).
Although in theory you can trade on any international currency pairing, the vast majority of currency trading is carried out on the following major pairings: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD, EUR/JPY, GBP/JPY and EUR/GBP. It is estimated trading on these 10 pairings accounts for 95% of all speculative global trading. It is worth noting that trading currencies is zero sum - if one currency moves up, the other must move down. In fact, currency pairs are a measure of the strength and competitiveness of one economic region against another. What's more currency swings can be dramatic which means that you can make/lose money fast (a busy trading session can result in a 200+ point movement). Tell that to famous trader George Soros who made some $1 bn in days shorting the pound in 1992.
An important thing to consider about forex spread betting is that depending on your perspective, do you buy or sell the forex pair you're interested in? For example, when looking at the GBP/USD (this widely traded forex pair is also known as 'cable'), if you believe that the GBP will gain against the USA dollar, then you will buy GBP/USD (and vice-versa i.e. sell if you believe that the USA dollar will gain against the sterling). The first currency (in this example GBP) is known as the base currency and this is the currency that you think will strengthen or weaken against the other currency (known as the 'quote' currency).
So what's the difference between normal currency trading and spread betting on currencies? One of the main differences is tax since if you deal through a forex broker you are liable to both capital gains tax (CGT) and commissions. The same would hold true for other currency derivatives such as contracts for difference, futures, options and covered warrants. Spread betting is unique in this sense in that gains are tax-free and the exchange rates are usually far better than any bank is ever going to offer you.
Spread betting allows you to profit from changes in forex pairs by utilising margin: your spread betting provider is lending you the bulk of the value of your spreadbet position by only requiring you to deposit a small portion of it; your margin. This is useful for forex trading, since many forex pairs only change incrementally against each other on a daily basis. Take the GBP/USD currency pair for instance. The Pound might rise against the Dollar over a one-month period from say 1.588 to 1.622, this is only a 34 point change. If you were to take a £4 per point spread betting position (with no margin), this would only result in a profit of about £136. However, spread trading providers quote fractional changes to the forex rate, one decimal point further to the right. In practice this means that you might see the GBP/USD price fluctuating between 1.5432 and 1.5571 in a single day. This equals a daily trading range of 139 points, and extending this over a month you could very well well see a move of 350 points or more, up or down.
So as we have seen currencies are typically quoted in 1000's units i.e. 1 unit = 1 Point. So if you see the Euro/ US Dollar (€/$) quoted at say 1.1707 - 1.1711 then this is effectively 11,707 - 11,711. Another example would be Euro/GBP 0.7086 - 0.7089 equates to 7,086 - 7,089. The first price is the Bid Price and the second quoted price the Offer Price. The bid price for a counter currency is always lower than the ask price. This is because the bid price, which makes up how much will be received in the counter or quote currency when selling one unit of the base currency, is always lower than the ask price, which represents how much must be paid in the counter or quote currency when buying one unit of the base currency. Please do check with your spreadbetting company exactly how their Currencies prices are quoted.
Once you have determined this the next thing to understand is exactly what these quotes actually mean - they can be very confusing. Here are some simply guidelines to 'de-mystify' the situation.
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