Spread Betting: Trading Pound/USD
Did you know that you don’t have to find a Forex broker and invest a reasonable amount of money in order to profit from trading forex exchange like the Pound/USD? Using spread betting, you can trade not only shares and indices, but also forex pairs and currencies, and you are not limited to ‘lots’ of 100,000 currency units but can name your own price. One example is the GBP/USD cross-rate – also known as ‘cable’.
The key factor that impacts the value of a country’s currency is its interest rate. So in practice trading a currency is a function of predicting where interest rates are heading and to do this one would need to keep an eye on economic data such as inflation and unemployment. In practice if inflation is rising, the central bank is likely to hike interest rates and this will support the currency. On the other hand, if the problem is high unemployment, then the central bank is more likely to keep interest rates low (or even reduce them) which will have a depreciating effect on the currency.
For short and medium term trading, spread betting using a forex rolling daily spreadbet is a most economical way to profit. Rolling daily simply means that the contract does not expire at the end of the day, but is rolled over to the next trading day. As with all spreadbets, the initial cost of trading is included in the spread you pay when you take out the contract. To keep the position open overnight, the rolling daily incurs an interest charge each day you leave the position open.
When you are spread betting on shares and roll a position over to the next day, interest is charged; likewise when you roll over a Forex spread bet, the amount of interest charged depends on the ‘Relevant Funding Rate’, which is derived from the interest rates for the different countries, and could even work out to a positive payment. Apart from having more choice in the amount you stake, this could be another advantage of using spread betting for your Forex trades.
Sterling/Dollar Spread Betting Example
Let’s say the present Pound/USD spreadbet price is 1.5020/1.5023 (sell price/buy price). Note Pound/USD spread bet works on a per 0.0001. A typical minimum spreadbet of 50p and minimum margin of 80 times the stake would apply with most providers. A quote of 1.5020/1.5023 would mean that the pound was worth a fraction above one dollar and 50 cents. A minimum spreadbet of 50p a point would translate into an exposure of £7,511.50 [15023 x 0.50]
Going Long
You believe sterling is undervalued and think it will appreciate against the USA dollar and thereby decide to buy (go long) at 1.5023 using a £10 stake per point.
You were right: As you predicted, the UK Pound strengthens against the USA dollar, and when it reaches 1.5210 you decide to cash in your gains. The rolling daily spread is now being quoted 1.5210/1.5213 and you sell at 1.5210 using a £10 stake per point.
Result: You bought at 1.5023 and sold at 1.5210, a rise of 187 points (pips), which at £10 per points nets you a profit of £1,870 (1.5210 – 1.5023 x 10).
Alternative scenario: If however, sterling had gone down (sterling depreciates) against the USA dollar to 1.4838 and you decide to close your position, you would net a £1,850 loss (1.5023 – 1.4838 x 10).
Going Short
You expect sterling to weaken (sterling depreciates) against the US dollar and decide to sell (go short) 1.5020 using a £10 stake.
You were right: As you correctly anticipated, sterling moves down against the dollar, and when it reaches 1.4860 you decide to close your position and take your profits. The spread betting company’s rolling bet spread is now 1.4857/1.4860 and you buy back at 1.4860.
Result: You sold at 1.5020 and bought back at 1.4860, a fall of 160 points (pips), which at £10 per point results in a gain of £1,600 (1.5020 – 1.4860 x 10).
Alternative scenario: If however, sterling had risen (sterling appreciates) against the USA dollar to, say, 1.5172, and you decide to close the position you would net a £1,520 loss (1.5172 – 1.5020 x 10).
For the purpose of simplicity, financing charges have been excluded from this example.
Pound/USD Trading Practicalities
The GBPUSD is quite a liquid but volatile currency pair to trade with daily moves exceeding 100 points being fairly normal. The pair also has a tendency to follow medum-term trends. If, for example, you are trading the Pound/USD, with the typical 100 to 1 leverage on your Forex account, you would need to put up $1,000 to buy one lot. Taking on a spread bet on the same currencies, you can trade anything from £1 per pip ($0.0001 change in value) on upwards. Your stake would depend on your broker, but would be a fraction of the Forex markets. You are not going to profit to such an extent from such a small bet, but it may be the difference that allows you to enter the market at all, or to place several trades.
The rolling daily cost will depend on your broker and the interest rates. It’s best to assume that there will be a charge, but it will still be minor compared with the money that you need for a conventional currency trade.
When you spread bet, you can take either the long or the short position equally easily, so all you need to do is figure out which currency is going to increase in value compared to the other. You should start this assessment by looking at which country has the higher interest rates. Given equal stability of the economies, the higher rate is likely to attract foreign investment and cause the currency to increase in value.
Another consideration is the market sentiment. How the market sees the currency pair may be very different from your own views. When sentiment reaches a peak it may be time for the current trend to change. It is also worth noting the trading range as each currency pair can trade differently especially during market overlaps. For instance the volatility of the GBP/USD increases sharply as the Asian trading session overlaps with the Frankfurt and London open. This time is particularly important as it can help reveal market momentum and changes in sentiment coming out of the close of the Asian session and the opening of the European markets and UK trading sessions.
Finally, you must look at the price charts, and see if the chart is supporting your view of the market, or opposed to it. It’s always best to find a trade that allows you to trade with the trend, as this gives the best chance of success.
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