Spread Betting and Forex

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Using spread betting to trade currency pairs on the Foreign Exchange Market (Forex) differs in many aspects to when you are utilizing other asset types. One of the primary differences is that currency speculation does not take place on a centralized trading floor. In addition, the size of Forex completely dwarfs that of other financial markets as its daily turnover is reputed to exceed over three trillion dollars.

Who Trades Forex?

All Forex contracts are conducted on the ‘Interbank Market’ or OTC (over the counter) via internet or telephone since the currency market does not process a central location or exchange. Essentially, the daily turnover of the currency market is produced by two major trading entities. The Foreign trade is generated by enterprises selling or purchasing currencies overseas as well as converting foreign product sales into local currency. However, this source of activity amounts to just 5% of the full turnover.

This trading sector includes companies (importers and exporters), national governments and traders with overseas exchange coverage. Their profits can be significantly impacted by the fluctuating actions of their own national currencies compared to those of their foreign business partners and investments.

The remaining 95% of the Forex turnover is produced by speculators who attempt to conduct transactions purely for profit. This sector, which includes corporations, banks and hedging funds, attempts to profit directly from price fluctuates in currency pairs. As such, you may be stunned to learn that the vast amount of Forex trading is mainly speculative. Only a minor portion results from the basic currency exchange requirements of corporations and governments.

Most spread betting brokers offer spreads on currency pairs for both quarterly futures and spot Forex. They provide price feeds displaying the best ask and bid prices for the most commonly used currency pairs in the world. As stated, currency spread bets are normally presented in two major forms.

 

Types of Currency Spread Bets

If you are an intra-day trader, then you should opt to activate positions using spot currency spreads. Alternatively, if you prefer to adopt a longer term approach then you will find that Forward Currency quotes have been designed specifically to satisfy your requirements. The most common period used by traders for this purpose is the quarterly contract.

When you are in the process of activating a spread bet using a currency pair as its underlying asset, then you should consider the following key points:

1. How is the currency pair being quoted?

2. What denomination will your trade adopt?

3. The optimum size of your bet to ensure that you do not overtrade.

You must appreciate that when you open a spread bet on a currency pair that you are not just activating one contract. You will, in fact, execute two as you will be betting that one currency of the pair will outperform its counterpart. For example, if you open a long spread bet using the EUR/USD, you will be speculating on the euro rising and the US Dollar falling.

 

Do not Seek Shortcuts

Although trading currency pairs using spread bets definitely as investment potential, you should not make the novice mistake of rushing in and attempting to locate short-cuts to success. In contrast, you need to understand that one of your most important weapons will be a powerful trading psychology.

This is because such a skill will enable you to counter all the problems that spread betting can throw at you. How can you best achieve this objective, you may well ask? You certainly cannot perform a set of mental exercises or drink some magic potion to develop the required levels of patience, confidence and perseverance that will allow you to control your emotions and gut feelings.

In contrast, you will need to adopt a more professional and business-like attitude to spread betting. You can perform this task by designing or acquiring a spread betting strategy and then incorporating well-constructed money management concepts into it backed by an expert psychology.

You need to understand as soon as you can that you will be confounded by a sizeable learning curve when you commence spread betting which will require some time to master. In contrast, you could suffer serious financial losses or fall foul of scammers if instead you attempt to locate quick profits and shortcuts.

Specifically, you must learn how to execute spread bets consistently over the long haul by applying a strict set of trading rules. In addition, you must limit the impact of large drawdowns on your equity by learning how to restrict your risk exposure. You must acknowledge that you will not conquer spread betting overnight in the same way that doctors and lawyers do not master their professions in short periods of time. Basically, you must devise and test methods that will help you minimize your risks and maximize your profits before exposing your own account balance to live spread betting.

Many experts advise that you can achieve this objective by advancing your spread betting approach from a low risk configuration to a high risk one utilizing small steps of incremental risks. To do so, you first need to develop or buy a spread betting trading strategy whose prime function will be to identify quality trading opportunities that harbor minimum risks but good potential for profits. You can utilize fundamental and technical analysis to assist you in identifying the main components for your new strategy.

Once this task has been successfully performed, you can start to implement your methodology by describing a configuration baseline which you will then be able to use to compare all future versions of your strategy after improvements and modifications. In addition, you must construct this baseline so that you will expose your account balance to minimum risks.

 

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