Currency spread betting markets may also be available through other companies. Notes.
How to Spread Bet on Forex
Dollar / Yen Financial Spread Trading Example
Should you decide to spread bet on a foreign exchange pair such as the Dollar / Yen then, on visiting a spread betting website like Financial Spreads, at the time of writing you would find a spread betting price of ¥83.900 - ¥83.910.
That means you can spread bet on the Dollar / Yen to move above ¥83.910 or below ¥83.900.
With spread trading, investors bet on every unit the market increases or decreases; in the case of the Dollar / Yen market a unit is ¥0.010 of the forex pair's price movement.
For this example, you could choose to bet £3 for every ¥0.010 the Dollar / Yen goes up or down.
Buying - Spread Betting on the Market to Go Up
If you bought the Dollar / Yen at ¥83.910 and the forex pair increased then the spread might become ¥84.372 - ¥84.382. If that were to happen, you could decide to take your profits by closing your trade at ¥84.372.
Profits (or Losses) = (final level of the market - initial level of the market) x stake per ¥0.010
Profits (or Losses) = (¥84.372 - ¥83.910) x £3 per ¥0.010 stake
Profits (or Losses) = ¥0.462 x £3 per ¥0.010
Profits (or Losses) = £138.60 profit
The markets can of course fall, if the market were to drop to ¥83.490 - ¥83.500, you might want to close your trade to prevent further losses. If that happened, you would sell the market at ¥83.490.
So, with the same £3 per ¥0.010 stake:
Profits (or Losses) = (final level of the market - initial level of the market) x stake per ¥0.010
Profits (or Losses) = (¥83.490 - ¥83.910) x £3 per ¥0.010 stake
Profits (or Losses) = -¥0.420 x £3 per ¥0.010
Profits (or Losses) = -£126.00 loss
Selling - Spread Betting on the Market to Go Down
One of the benefits of spread betting is that investors can go short of the markets.
If you recall, initially the spread betting price was ¥83.900 - ¥83.910.
If you were to go short of the Dollar / Yen at ¥83.900 and the forex pair decreased then the spread might change to ¥83.405 - ¥83.415. Therefore, you might decide to close your trade at ¥83.415.
Profits (or Losses) = (initial level of the market - final level of the market) x stake per ¥0.010
Profits (or Losses) = (¥83.900 - ¥83.415) x £3 per ¥0.010 stake
Profits (or Losses) = ¥0.485 x £3 per ¥0.010
Profits (or Losses) = £145.50 profit
Nevertheless, if the market had increased to, as an example, ¥84.330 - ¥84.340, you might want to close your bet to prevent further losses. If so, you would buy at ¥84.340.
With the same £3 per ¥0.010 stake:
Profits (or Losses) = (initial level of the market - final level of the market) x stake per ¥0.010
Profits (or Losses) = (¥83.900 - ¥84.340) x £3 per ¥0.010 stake
Profits (or Losses) = -¥0.440 x £3 per ¥0.010
Profits (or Losses) = -£132.00 loss
Dollar / Yen Rolling Daily spread betting prices accurate as of 04-Apr-11.
A Guide to Forex Spread Bets
Forex, or the foreign exchange market, is the largest financial market in the world. The forex market operates across the world 24 hours a day and with no single location, like a stock exchange, acting as its central focus. Although that does not necessarily mean that your broker will be open 24 hours a day.
A significant proportion of forex activity is speculative in nature, with traders betting on the likely rises or falls of currency pairs. Markets are quoted in pairs, so each trade involves the simultaneous buying of one currency with the selling of another. The most commonly traded currency pairs are dollar/yen, euro/dollar, pound/dollar and euro/pound.
Forex Spread Betting Tools
Given the sheer volume of trades placed on the global forex market, several common trading strategies utilise automated tools for risk management. A major advantage of using automated trading orders is that it can help to take human emotion, such as fear or greed, out of the equation.
Certain traders may panic or overextend themselves, with risk management tools such as guaranteed stop loss orders and limit orders you can set the levels that you want to close your position at. These are also important because you can’t, and shouldn’t be trying to literally, trade the markets 24 hours a day. These trading orders will close your positions when you’re away from your desk.
Forex Spread Bets - Technical Analysis
Many forex brokers and spread betting companies like FinancialSpreads.com and CMC Markets and City Index will provide clients with charting packages. Charts are key to technical analysis. The principle of forex technical analysis is that all the data about a currency pair is built into any price fluctuation. As such, there is no need to analyse financial reports, economic news etc because those elements are already priced in.
Forex technical analysis is popular because it can be relatively quick. However with all technical analysis there is a key disadvantage. The analysis is predicated on historical data. Just because a currency pair has risen over the last few days that certainly doesn’t guarantee that it will continue to do so.
Price Action Forex Strategies
Price action forex strategies follow price fluctuations without recourse to charts and price indicators. Instead, a price action forex strategy is based on swift decision making. Traders choose to open or close their trading position based on their observation of price fluctuations in real time. This type of strategy seems to rely on little analysis and mostly on luck. It’s probably wise to try to avoid it.
Fundamental Forex Strategies
Fundamental forex analysis is based on the fundamental factors that affect the trading of foreign currencies. Common fundamental indicators are national interest rates, macroeconomic growth, unemployment figures, political events and other significant current events.
A fundamental forex strategy is underpinned by a belief that certain news events or significant developments are, in themselves, enough to affect the price movements of certain currencies pairs.
The market can react negatively to political instability, for example, by a depreciation of that particular country’s currency. On the other hand, a currency can increase in value as a particular nation’s economy is seen to be improving or recovering from recession.
Spread betting carries a high degree of risk to your trading capital and can result in losses that are greater than your initial investment. Please ensure that it fits your investment needs as it may not be appropriate for all classes of investor. Only spread bet with money that you can afford to lose. Before trading, please ensure that you are fully aware of all the risks involved and request independent advice where required.
Note - Spread Betting carries a high level of risk to your capital and you can lose more than your initial investment, it may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
'A Guide to Forex Spread Bets', Feature by D. Jones, last update: 15-May-12
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