Spread Betting Currencies
Trading in currencies within financial spread betting is somewhat different to the other trades that you are used to reading about so far. To start with currency markets (also known as forex markets or FX markets) are different to most other financial markets in that they are not traded on a formal exchange.
Volumes traded in the currency markets are vast totaling some $2 trillion every day making FX markets the largest and the most liquid markets in the world.
Participants in the FX markets can be numbered in the millions from retail investors (like you) to major banks and corporations and even central banks. Most of this activity is short term trading made in an attempt to profit from small movements in exchange rates. But underlying this is a sizeable swathe of real business with corporations hedging themselves against future currency exposure on existing contracts.
As with all markets, currencies are affected by many different factors from economic to political and back again. Forex markets are open 24 hours a day and a spread betting provider like Capital Spreads will quote them from 23:00 on Sunday to 21:00 on Friday.
A spread betting provider like Capital Spreads will offer quotes for both the spot FX market and quarterly futures. For instance, to quote FX prices, Capital Spreads subscribe to a data feed which shows the best bid and offer price in the market for any given currency pair, from several major banks. The best bid might be from one bank and the best offer might be from another bank. The spread betting provider then takes the best of each: the highest bid and the lowest offer. It then adds them together and divides by two and puts a spread around this mid-point.
Currency bets are usually divided in to two types of trade:
Spot Currency Bets, which are predominantly used for short, term trading such as Intra-day trading.
Forward Currency Bets (including bets on the Chicago Mercantile Exchange known as CME currencies) are ideal for those wishing to trade in the longer term on currencies. The usual trade is that of the standard quarter contract, much like that of other trades we have talked about before. However there are other key differences that make trading in currencies different and therefore more interesting to trade.
Please take note of the following key differences:
- Which way round the currency is being quoted
- The currency your trade is being denominated
- The size of your transaction in the foreign exchange market, which is the
equivalent of your bet
How to know which way round you are betting?
When you trade in currencies. You don’t open a contract on one currency market, you open a contract on whether a particular currency is either going to strengthen or weaken against another. You never just trade a single currency. It has to have something to pivot against. For instance you may wish to trade in the EURO/US Dollar, which is a trade that means that the EURO will strengthen or weaken against one another.
So how do you determine which direction you are trading?
Well if you wanted the EURO to strengthen against the US Dollar you would look for the following quote EURO/US Dollar and the type of trade you would look to make would be a LONG trade.
If on the other hand you were expected the USD to strengthen against the EURO, you would once again look for the above trade. However, the type of trade that you would be looking to make would be SHORT.
It depends how you wish to look at it. All you are simply saying with the above opening trades is that you either believe the EURO will go up LONG or down SHORT in relation to that of the USD.
At first it can be quite confusing, which is why it is best that you get used to trading normal stocks, before moving to the currency markets.
Which currency is your bet denominated?
The usual denomination to which your trade in any currency is converted back to is either the USD $ or GBP £ (Sterling). Dependent upon which denomination you wished to be key when you opened you trading account.
However, some spread betting companies ask you which denominating currency you wish the trade to be closed in.
For instance if you were to be trading the Swiss Franc/US Dollar, you could with some Financial Bookmakers, request when opening the trade that the currency upon close be converted into Swiss Francs, regardless of whether you had opened the trade LONG or SHORT.
Why do this? For smaller bets chances are the denominating currency will make little difference to the overall amount you receive. However, should you be in the enviable position to be trading above and beyond £10,000 then the exchange rate of one currency to another maybe more favourable to that of your own.
You need not worry too much about it here. I am telling you this so that you have a clear understanding of how currencies work. Who knows you maybe in that enviable position of trading thousands where that extra few cents/pence make a great deal of difference, Institutions mainly use the above choice of denomination.
How big is your trade?
We need to be clear what a ‘Point’ is in currency trades. A ‘point’ is the last figure that you are quoted when you open a trade (some currency trades are 4 or 5 figures). If you were quoted Euro/US Dollar £10 per point 8490/8500 and you went LONG – for each point (single number movement up or down) your trade went up.
Let’s say you closed the bet at 8515,which could have been only seconds later if trading intraday, you would have made £150. As you opened the trade at 8500 and closed at 8515, which is a 5 point difference. The same calculation works in the opposite direction for SHORT trades. If you went short, thinking the EURO would weaken against the Dollar and opened a the trade SHORT £10 per point at 8490, if the Euro weakened and went down to 8450. You would have made a 40 point difference and a comfortable £400 profit.
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