Spread Betting Currencies

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.

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.

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. 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.

Currency Trading Tips

1. Some 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.
2. Trends tend to persist longer in Forex – for instance the weakness in the US dollar has persisted for many years.
3. Forex moves are caused by interest rates, fundamentals and technicals. But big moves in a currency can also trigger central banks to intervene (doesn’t happen with other markets such as stocks or commodities).
4. Try to avoid trading on around non-farm payroll day (the first Friday of each month), unemployment figures day or on manufacturing data numbers. Huge spikes can occur 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….

Spot FX

For shorter-term positions of up to a few days it can be better to use a spot currency bet. These close at 8pm UK time and settle at the prevailing spot rate, although it is possible to rollover them over into the next day at a small additional cost.

Forward FX

Forward FX bets are suitable for taking longer-term positions of up to 6 months. In the underlying markets, a forward currency is an agreement of a rate today at which currencies will be exchanged on an agreed date in the future. The Forward FX bets are very similar, except rather than exchanging currencies, bets are simply expired based on the spot rate at 8pm London time on the expiry date of the contract. At any point in time the forward rate will reflect the current spot rate and the effect of the interest rate differential between the two countries over the remaining time to expiry.

For example, let’s say the spot rate of GBP/USD is 19910/19922. Someone who thought that sterling would continue to strengthen against the dollar over the next three months could buy a forward FX bet on the sterling/dollar rate at 19922 for $2 a point. This bet would be the equivalent of buying £20,000/selling $39,844 in the foreign exchange market and would require an initial margin deposit of just $600. Should sterling appreciate against the dollar and the quote move to 19980/19992, the position could be closed at 19980 for a profit of 58 points or $116.

Spread Betting on Foreign Exchange

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.

Also, foreign exchange spread betting gives you the opportunity to leverage more than betting on assets such as equities. TradIndex 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.

To succeed in spread betting on foreign exchange, many traders look out for 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 Tradindex 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.

But betters should also keep a close eye on economic news, such as unexpected interest rate movements, as these can have a significant impact.

On a departing not it is widely regarded that CMC Markets offer the best prices and services for pure currency spread betting.

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