Trading the USD/BRL Currency Pair
The Forex currency pair USD/BRL has recently become available through IG Index for spread betting. It is included under the “Emerging Markets” tab, and so far is only available for spot prices.
Although you are probably familiar with the USD standing for the US dollar, you may not know that BRL stands for the currency of Brazil, the Brazilian Real. As one of the original BRIC countries, the economy of Brazil is considered to be on the up. A couple of years ago, the price was around one US dollar equals 1.6 reals, but as you can see from the chart above a dollar will buy approximately 2 reals nowadays.
There have been various manipulations to try and control the value of the Brazilian currency. It depreciated by about 10% against the dollar in 2012, because of the various intentional government actions. Concerned about a lack of competitiveness, the government weakened the currency by restricting currency inflows, by placing taxes on a number of financial transactions. In addition, the central bank intervened to reduce dollar purchases, and commenced currency easing in 2011.
The end result can be seen in the current figures, which have greatly increased the competitiveness of Brazil in the international markets. However, this is also a lesson to those who would trade emerging markets and exotic currencies, in that unilateral action can drastically affect the best of analysis, and impose price moves which may not have been foreseen.
That aside, it can be seen that technical analysis works in this market as much as in any other. For instance, looking at the narrowing down the Bollinger bands in November 2012, it was followed by a rapid breakout as is so typical of this formation. In this case the breakout was upwards, but usually band narrowing does not provide any particular indication of the resulting direction that can be expected.
USD/BRL Rolling Daily Spread Bet
When you are spread betting on currencies, you must realize that they are different from stock prices. Forex prices are measured in pips, which are four decimal places, two more than you would expect with stock quotes. The current quote for the USD/BRL, the US dollar against the Brazilian real is 19,488.5 – 19,518.5, which in real terms means that one US dollar would buy about 1.95 Brazilian reals.
Suppose you are bullish on the Brazilian real in relation to the US dollar, you would expect the number of reals that you can buy for a dollar to fall. That means you would be bearish on this currency pair, looking for the price to drop. Perhaps you would stake £1.50 per point on a sell bet at 19,488.5.
If you’re right, perhaps the price would go down to 18,988.5 – 19,018.5 and you could collect your winnings. You opened the spread bet at 19,488.5, and closed it at the buying price of 19,018.5, which means you gained the difference, 470 points. With a £1.50 bet per point, you would have won £705.
It is easy to be wrong when trading, and you must learn to accept your losses, keeping them as small as you can, and move onto the next spread bet. Say the price went up to 19,738.5 – 19,768.5, and you closed the trade and accepted your loss. The distance from the opening price of 19,488.5 to the closing price of 19,768.5 is 280 points. That means that with a wager of £1.50 per point, you would have lost £420.
Many spread betters use a stop loss order, placed when they open the trade, to protect them from losses becoming too large and saves them having to watch the market. In this case, say a stop loss order triggered and closed the losing trade at a price of 19,638.5 – 19,668.5. The closing price would be 19,668.5, so taking away the opening price of 19,488.5, the loss this time is 180 points. Multiplying by £1.50, your total loss works out to £270.
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