Forex Spread Betting
Despite the notoriety of the stock market, forex is the main trade in the City, far eclipsing share dealing. The foreign currency exchange market is a global trade that deals around the clock and offers an option for traders who want to benefit from falling markets as well as those that are rising.
Forex, however, is a complicated trade and requires a lot of research and studying prior to entering the market. Being a global venture means there are many different influences on price that have to be considered and it is very different to trading conventional stocks and shares.
In forex spread betting, the investor is predicting how the price of one currency will move against the other; either up or down. Two prices are quoted, which are the buying price and a selling price. When the position is opened, one price is used and when the spread bet is closed, the price at the opposite end of the spread is used. But remember that the spread is not fixed and will constantly move with the market. The price that the broker uses to close the position will be the latest one, not the opposite price in the spread used to open the bet.
Spreads can be quoted either in whole numbers or decimal places. The principle is the same for both but before placing the bet make sure you know what represents a pip (one unit of movement). Getting it wrong could end up costing a lot of money!
Spread betting on Forex: an Example
You have read up on the euro debt crisis and are closely following the U.S. recovery and want to have a punt on the relative fortunes of the euro and the U.S. dollar. Your broker is offering a two way spread on the EUR/USD at 13263-13265.
You are pretty sure that the single currency is going to fall further as the greenback is enjoying a revival. You therefore short the bet and sell the euro at 13263, at £10. It turns out that your homework has paid off and the euro tumbles. Your broker is now offering a spread of 13240-13243, so you opt to close the position and collect your winnings.
As you are now ‘buying’ (the opposite to how you started the bet), you use the upper price of the two to close your position. The difference between this and your opening price multiplied by your stake determines how much you win. In this case you walk away with £200 (opening price 13263 – closing price 13243 = 20 points x £10 = £200).
But assume that the market had thrown a curve ball, as it often does and the euro had risen. Your broker is offering a spread of 13280-13283 and you don’t want to risk your losses getting any worse. You opt to close your position. You would once again ‘buy’ the price and would have to fork out £200 (opening price of 13263 – closing price of 13283 = 20 points multiplied by £10 per point).
The bet would work in exactly the same way if you had opted to go long and had predicted the price of the euro would rise. In this scenario, you would have bought the original price of 13265 and would have lost £250 if you had closed when the spread was at 13240-13243 (original price of 13265 – closing price of 13240 = 25 points x £10).
You would, however, have won £150 if you had closed when the market reached 13280-13283 (opening price of 13265 – closing price of 13280 = 15 points x £10 per point). Remember if you had opted to go long originally, you would use the lower price to ‘sell’ to close the bet.
There are many advantages to spread betting on forex. The market is so huge that there are no concerns about liquidity and you can trade more or less around the clock, should you so desire. It is also far less susceptible to influence from individual traders because of its sheer size. Also of course, it allows you to benefit from falling markets, a serious advantage in the current economic climate.