Forex Trading – An Introduction
Right then, we all know about trading the markets, we all know the kudos surrounding it, we’ve all seen ‘Wall Street’ and think we could be the next Gordon Gecko. But, we also think that it’s just a pipe dream, something that we’d love to get involved in but can’t. It’s a private club and we don’t have an invite. Thing is, the world has changed a bit, and the power of the Internet means that you do have an invite. But, before you jump in, take a minute to learn some of the facts about forex spread betting.
Spread betting itself as a medium adapts well to foreign exchange trading, as the currency markets can be very volatile, often generating big movements in a very short time-interval. Most providers will offer both spot trades which are mostly suitable for holding over the very short-term and forward trades which are better for holding positions over a longer time frame – say several consecutive months.
The idea of forex spread betting is pretty straightforward. The sell and the buy price are called the bid and offer price (it’s actually the other way round, but for practical purposes, sell = bid, buy = offer). If you think a particular currency will rise in price, you would buy (go long) this currency at the offer price. If you think a currency will fall in price, you would sell (go short) this currency at the bid price. Buying and selling like this is also known as ‘taking a position’.
When you take a position, it is with a forex spread betting company. Although it’s basically the same as trading (you’re predicting price to go up or down), in forex spread betting you don’t physically buy or sell any real currency. Just like the name suggests, you are betting it will go up or down. If you are right, you win the bet, if you are wrong you lose the bet.
The other thing about currency spread betting is that unlike normal trades, you don’t pay a commission to your broker for taking positions. Broker’s make their money by giving you a bid/offer spread. That means you will buy a currency at a slightly higher than market price ($1.5001 instead of $1.5000), and you will sell at a slightly lower than market price ($1.4999 instead of $1,5000).
The amount you bet is usually determined by £s per pip. A pip (aka a point or tick) is the 4th decimal placed number in the price of a currency.
Eg. If price moves from $1.5001 to $1.5003, it would have moved 2 pips (the 4th decimal places would be 3 – 1 = 2).
So in the above example, if you had bet £5 per pip, and you were right, you would have made 2 pips x £5 = £10.
Currency pairs (this bit is not very important):
Forex spread betting is slightly different to other financial instruments (like shares, commodities and indices), in that you always bet on currency pairs.
Eg. If you think the pound sterling is going up, you would probably buy the Sterling/Dollar pair. Meaning that you buy sterling and sell dollar at the same time. Don’t worry about this too much right now, its not relevant to placing a bet (just background information really).
Leverage, gearing and margin:
The above terms basically refer to borrowing money. Forex spread betting only requires you put up a small amount of your own money to trade much larger sums of currency. This means you can control a large amount of currency and make large returns with a small amount of your own capital.
Eg. If you bet at £1 per pip and go long (buy), it is the same as controlling £10,000. Depending on your broker you may only need to put up as little as £20 (aka margin) to make this bet. This means your broker is willing to lend 500 times the amount you put up (£20 x 500 = £10,000). This much leverage (aka gearing) is quite common in forex spread betting.
Although this is great because a tiny 20 pip move in your favour would double your capital (£20 becomes £40), the opposite is also true. A tiny 20 pip move against you would wipe you out. Leverage can be both a blessing and a curse – be careful!
Is forex spread betting for you?
In my opinion, forex spread betting is for anyone. That’s because there are so many ways of doing it successfully, it’s very personal. You have the choice to bet big, bet small, go long, go short, day trade, week trade or any other way you can think of. Success in in forex spread betting is determined by you, the individual irrespective of race, creed, colour, sex, intelligence, age and anything else that might otherwise be discriminated against.
So, why not give it a go?