Trading Currencies & the Forex Market
Currency trading used to be about having a lot of money to invest in large quantities of foreign currency, holding on to this for several weeks and eventually selling when you had either made or lost an even larger amount of money. This kind of fundamental currency trading made investors such as George Soros a household name when he famously speculated against the British pound and made around $1billion dollars and simultaneously brought the Conservative British government to their knees.
Currency trading has moved on a long way since the days of it being an activity of large-pocketed investors and financial institutions. The birth of the internet and software development has made it one of the fastest-growing online industries in the world, attracting people from all walks of life and allowing traders to gain large profits without having to have the funds of George Soros. Currency spread betting has been at the forefront of the modern forex trading.
The global forex market is in itself worth a $4 trillion-a-day and spread betting has established itself as the most popular way for individual traders to speculate on price moves principally due to its simplicity and potential for large profits.
Currency spread betting works by allowing an investor to place a ‘bet’ on the future value of a currency pair rising or falling. Currency trading relies on two different currencies being quoted together to form a pair. This is made up of the ‘base’ currency and the ‘quote’ currency meaning that the first currency in the pair is valued in terms of the second currency. For example if you were currency trading on EUR/USD you would receive the quote of one single Euro in US Dollars. When currency spread betting quotes provide an investor with the opportunity to place a bet they will offer two prices either side of this price. The higher price is the price at which a bet on price rising can be placed and the lower price is the price at which a bet lower can be placed. This is why this form of currency speculation is known as spread betting.
Once a quote has been received and the investor knows which direction they believe the price will move in the future a spread bet can be placed in this direction. Currency spread trading works making each incremental change in the value between the currencies be valued as one ‘point’. When an investor spread bets £1 per point they will make or lose the amount of points that their bet has gained/lost when they decide to close their position. All currency spread betting firms offer the ability to use stop losses which will limit the number of points in the opposite direction that a spread bet can remain open. It will automatically close out a position as soon as it hits this level which is determined by the spread trader in advance. Currency spread betting, as with all financial speculation, involves risks but the rewards can also be incredibly high. Some platforms allow beginners to spread trade forex from as little as 10p per point and up to as much as they are willing to risk.
Finding a currency spread trading broker has become increasingly straightforward with a wealth of brokers offering services to suit all traders. However, care still has to be taken as in this kind of over-the-counter (OTC) market you are dependent on your providers to offer competitive and transparent execution. Look at the size of the bid-offer spread which should be tight particularly for the more liquid currency pairs but also look at the quality of the execution – do you normally get the price you are offered on-screen? From services to suit those with larger investment deposits, many brokers provide premium individual management accounts whilst smaller account members can still gain access to free features including high quality charting and competitive quotes. Spread trading brokers also provide all accounts with access to multiple markets to trade on. These include numerous currency spread trading quotes covering the major forex pairs with many also offering spread trading on the minor and the exotic pairs. Many investors prefer to trade the major pairs because of the tight spreads that they are quoted with.
These major currency pairs include the major US dollar pairings, including the Euro against the US dollar which often has the lowest spread of all forex pairs at around 1 point. The benefits of currency trading with such a low spread are that it allows spread traders to enter the market closer to profit. A wide spread will mean that the market has to move further in order for that position to move to break even and in to profit. Currency spread trading on wide spreads is often restricted to those currency pairs that can be considered volatile or erratic. Brokers give them a wide spread to reflect the increased risk and often the exotic and thinly-traded pairs can swing wildly and over many hundreds of points per day.
Naturally there are more opportunities when trading diverse currency pairs but you need to know your currencies well before starting to trade them. It is worth noting that most currencies are interconnected and movement in one currency pair can often be linked to movements in others. A good example of this phenomenon are the euro/dollar (EUR/USD), sterling/dollar (GBP/USD) and euro/ sterling (EUR/GBP) currency pairs. If you are trading any of these pairs then you want to be keeping an eye on the other two, since moves in them can indicate a change in the pair you want to trade.