Spread Betting: Trading GBP/CAD
If you spread bet on the GBP/CAD, the pound sterling against the Canadian dollar, then you are taking a bet on the strength of “the other” North American currency, which can be quite different from the US dollar. Although they are on the same continent, and joined by a very long boundary, the Canadian and American economies, despite their dependency on each other, are run in different ways.
For a start, Canada is one of the world’s largest oil producers so when the price of oil rises, the Canadian dollar tends to go up too. In the language of the Forex traders, the Canadian dollar or “loonie” is a commodity currency. Canada also has a fair share of gold, and is the fifth largest producer of gold in the world.
Canada is a large country, but with a relatively small population, unlike its southern neighbour the United States with which it does about 80% of its international trade. It is surprising to note that Canada supplies more oil to the United States than any other country, and any trading between countries requires currency conversions to pay for the goods. While Canada is a net exporter, the US is the world’s largest consumer of oil, so any increase in the price of oil has a positive effect on the Canadian dollar.
However, although Canada has differences from the US economy, because it is such a large trading partner a downturn in the United States economy reflects badly on the Canadian dollar.
It is common knowledge when looking at currency trading that central bank intervention is used to control or influence values. The Bank of England does so to maintain the value of sterling, while containing inflation and boosting growth. Interestingly, the Bank of Canada used to perform this function but has not intervened in the currency for some time, as the government decided in 1998 that intervention was ineffective and pointless.
Some of the unique Canadian features include the already mentioned link to commodities, where an increase in oil and gold prices is a good thing for the loonie; Canada does not have much high-tech employment, so did not benefit during the end of the 20th century when major developed countries were riding high on the electronics boom; and Canada’s financial markets are differently structured and generally managed to avoid being dragged down in the US mortgage meltdown.
For its part, the British economy is gauged by the level of employment and unemployment claims, by the balance of trade, and by factors such as the Consumer Price Index, measuring inflation. Similar figures are produced by Canada, so the fundamentals of each country can be easily compared.
Having said that, spread betting is a short-term trading instrument so that fundamentals of an economy provide only a background to the price movements. In any short-term trading, it is important to take account of technical analysis, that is the analysis of price fluctuations including derived indicators such as oscillators and moving averages.
Spread Betting the GBP/CAD
The GBP/CAD counts as a minor Forex pairing, as these currencies are not traded against each other so very much, despite both being major currencies in their own right. So the quotation from your spread betting provider may be in a secondary folder, rather than the main Forex folder. The current price from IG Index is 15,687.8 – 15,700.8, that is a spread of 13 points on a daily bet which is much larger than the major pairings see. A large spread eats into your profits, as you have to make up the spread with the price move before you even start to make money.
If you are bullish on sterling, particularly compared to the Canadian dollar, then you might want to place a buy bet on the GBP/CAD, staking say £25 per point. This is a large bet for many traders, and you have to work out how much you can afford to lose if the bet goes against you before placing such a bet.
If you are successful, and the quote goes up to perhaps 15,832.3 – 15,845.3, you could close your bet and take your winnings. You can work out how much you won by figuring out the number of points that you gained and multiplying it by your stake.
As your bet was a long bet, it went on at the higher or buying price, and it closes at the lower or selling price. That means your bet was opened at 15,700.8, and it closed at 15,832.3. The difference in these is 131.5 points. Multiplying 131.5 times £25 you find you have won £3287.50.
If on the other hand the price went against you, you would have to close your bet quickly to avoid losing too much of your capital. As a rough guide, traders usually reckon to risk losing not more than 2% of their account on any one trade. If the quote went down to 15,653.2 – 15,666.2, you could close your bet and accept your losses.
Your bet went on at 15,700.8, and this time it closed at 15,653.2. That means you lost 47.6 points. At your chosen stake of £25 per point, it has cost you £1190. You can see the impact of the large spread, as if the spread was only a couple of points you would have saved £200 to £300 on this big a drop in price.
Say that instead of backing sterling, you are bullish on the “loonie”, the Canadian dollar. You place a bet of £5 per point, which would go on at 15,687.8 as it is a sell bet on the currency pair. The quote duly falls to 15,493.1 – 15,506.1 and you close your bet and take your profit.
This time your bet went on at 15,687.8, and closed at 15,506.1, for a gain of 181.7 points. Multiplying this by your stake gives you a win of £908.50.
Once again you must consider that you could have lost on the bet. Say the quote went up to 15,731.6 – 15,744.6, and you closed your bet. The bet opened at 15,687.8, and closed at 15,744.6. That’s 56.8 points you have lost. At your chosen stake that works out to £284.
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