SPREAD BETTINGON FOREX
Spread betting on currency pairs is increasingly popular in today’s markets. Given the $3.98 trillion estimated daily turnover of FX trading, it is clear that Forex trading is a booming industry. Previously, FX trading was reserved solely for multinational corporations and big banks. Today, individual speculators can also dabble in the Forex markets. Spread betting allows individuals to engage in Forex trading with a host of major, minor and exotic pairs with a low upfront capital outlay. Plus, traders don’t need to purchase currency pairs!
What is Spread Betting on Forex?
Spread betting on Forex is a burgeoning global industry. It is estimated that half of the business conducted by ETX Capital comes in the form of Forex spread betting, and much the same is true of other leading Forex providers. There are 7 major currencies traded in the international spread betting markets. These include the Swiss franc (CHF), the British Pound (GBP), the EUR, the Japanese Yen (JPY), the Australian dollar (AUD), the Canadian dollar (CAD), and the US dollar (USD). The most popular spread betting Forex pairs include the EUR/USD (the Euro), the GBP/USD (the cable), the USD/CAD, the AUD/USD, and the USD/JPY.
Forex spread betting requires the trader/speculator to place a bet on the price movement of a currency pair. Brokers typically offer 2 prices when it comes to Forex spread betting: the bid price, and the ask price. The difference between the two is known as the spread. With Forex spread betting, speculators place wagers on the price movements of the currency pair. In other words, a bet is placed on whether the pair will be higher than the ask price, or lower than the bid price. The costs of Forex spread betting are always less when the spread is low (a narrow spread). FX spread betting is leveraged trading since the company lends money to the trader to place the trades.
Spread Betting on Forex Vs. Forex Trading
There are notable differences between spread betting on Forex and Forex trading. First of all, spread betting on Forex does not require exchanging any real currency. Plus, speculators do not purchase the underlying financial instruments that they are trading i.e. Forex. Spread betting on Forex is basically taking a position on the future price of a Forex pair. If you’re bullish, you would long buy, and if you’re bearish, you will short sell the pair. The variation between the bid and quote prices determines the profit, based on the trader’s speculative position. Spread betting is derivatives trading – you’re simply speculating on price movements.
Forex trading is an entirely different paradigm. When you buy or sell Forex, i.e. Forex trading, you are exchanging one currency in the pair for the other. The exchange rate between the two currencies is crucial to understanding Forex trading. If you’re trading the cable (GBP/USD) and the exchange rate is 1.35, it means that you will get $135 for every £100 that you sell. If the exchange rate changes to 1.45, you will get $145 for every £100 that you sell, for a profit of £10. The difference between the buy and sell rates determines your profit. Most transactions are OTC (over-the-counter) and deals are known as spot deals.
Advantages of Forex Spread Betting
There are many notable advantages to Forex spread betting. For starters, in the UK profits are not taxed. However, with Forex trading, your profits are not tax-free since you have to pay stamp duty and capital gains tax. In Forex spread betting, you’re only required to place a small amount of the value of the trade upfront. This is known as the margin requirement. You can trade incredibly huge volumes with a small capital outlay.
Leverage allows you to expand the size of your trade by up to 200:1 at many leading brokers. When trades move in your favour, you profit accordingly, and when trades move the other way, your losses can exceed your capital outlay. With traditional Forex trading, you’re required to place the total value of the trade on the table upfront. Your profits/losses are limited to what you have put down on the trade. Spread betting offers greater flexibility to novice traders, and experienced traders, and also serves as a perfect hedge against Forex volatility.
Forex Spread Betting- Tips and Strategies
The most important tips when it comes to Forex spread betting are the following:
- Always choose a reputable, transparent and approved Forex spread betting platform.
- Contrary to popular belief, you can hold a spread betting position for several months, as opposed to a few days or weeks.
- Start with a currency pair that you understand such as the USD/JPY, EUR/GBP, EUR/USD, or USD/CHF. These pairs are generally stable, and you can expect less volatility.
- Use technical analysis such as MACD (moving average convergence divergence), pivot points (support and resistance levels), trend analysis, and other analytical techniques where possible.
- Read as much as you can about your chosen spread betting pairs and what factors are likely to influence currency price movements. These include macroeconomic variables (interest rates, inflation rates, DXY (US Dollar Index) and geopolitical uncertainty).
- Follow the economic news indicators closely to determine what factors will lead to a currency appreciating relative to other currencies, or depreciating relative to other currencies.
- Short sell if you think a currency will weaken, and long buy if you think a currency will strengthen.
- Exotic currency pairs are more volatile and subject to wilder price fluctuations. This makes them expensive to deal in, since the spread is high.
- Avoid trading when non-farm payrolls data (NFP), unemployment data and other manufacturing data is released. These economic data releases are associated with low levels of liquidity, and high price fluctuations. Many traders lose money during these sessions.
Ready to start spread betting on Forex? Check out our full UK Spread Betting Brokers Comparison!