Currency Spread Trading

Although the foreign exchange (Forex) trading market has been one of the biggest growth industries in recent years, spread betting is also proving popular, and currency spread trading offers the same advantages and some additional ones of its own.

One of the much advertised advantages of the Forex market is that you have tremendous leverage, that is, your money is multiplied in effect. You do not pay for the whole amount of currency that you are trading, but just a fraction, by trading “on margin”. This term comes up in various types of financial trading, and basically means that you are borrowing a large part of your trade’s value from your broker or provider.

You must realize that leverage can be a double-edged sword, for the multiplying effect works both ways, magnifying any losses as well as your gains, but if you take steps to educate yourself to be a winning trader, then the profit multiplication is a tremendous boon.

However, with regular Forex trading, you are trading on “lots”, or sometimes smaller “mini-lots”, that represent a certain amount of currency, often 100,000 units, such as $100,000. With the common amount of leverage for a “cash” market of 100:1, this would cost you $1000 to trade.

Currency spread trading, using spread betting to bet on exchange rates, allows much more flexibility than this, letting you trade with less cash or hold several positions for the same amount. Spread trading also allows you to enjoy significant leverage of your funds. Your spread betting provider will provide figures for your personal circumstances, and you will find that the spread betting company will usually provide you with more than enough leverage for the risks that you should be taking.

Usually currency traders will concentrate on the big four, or sometimes six, currency pairs. These are : –

  • Euro/US dollar (EUR/USD)
  • US dollar/Japanese yen (USD/JPY)
  • British pound/US dollar (GBP/USD)
  • US dollar/Swiss franc (USD/CHF)
  • US dollar/Canadian dollar (USD/CAD), and
  • US dollar/Australian dollar (USD/AUD)

There are many other currencies that can be traded, some of them known as “exotics” because they are not mainline currencies, but often the currency trader concentrates on these “majors”, as they can provide all the action needed for regular trading.

Currency spread trading is, if anything, even easier than regular Forex trading. Each of the currency pairs will have two prices quoted by your spread betting company, and you choose which way you think the exchange rate will go. The difference between the two prices is the spread, and is the way that you pay indirectly for the spread betting provider’s services.

You can bet that the rate will rise or will fall, and choose your stake, which might, for example, be £1 per point. When the exchange rate changes, you win or lose £1 for each number it goes up or down. You have total choice over how much you bet, and when to get into and out of the position. Currency spread trading gives you complete control over your financial trading.

Analysing the Forex Market

Some investors using a Forex trading platform are primarily interested in doing the kind of market analysis that relies on macroeconomic factors. Such traders examine whole economies to make their trading decisions, basing them largely on news items as they emerge. Other traders, however, favour a technical analysis approach.

As such when analysing the Forex market, there are two main options – traders can choose between using a technique known as fundamental analysis or the alternative option, technical analysis.

Fundamental Analysis

Fundamental analysis involves the exploration and investigation of multifaceted aspects of global culture. For example, the focus here is on the political, economic and social forces that have an impact on supply and demand worldwide. Large-scale and general economic indicators are used to make assumptions and judgements, leading to trading decisions based on the fullest possible available information. These include data on unemployment, interest rates, the rates of economic growth and inflation. Usually, it is possible to access much of this information for free. For example, CitiFX reviews outline the excellent quality of Forex news and information available via Citigroup, which is behind the CitiFX Pro trading platform.

In terms of how this information is interpreted, the short answer is that this is highly subjective – individual traders will consider the different types of data in different ways and weight their importance and relevance accordingly.

Technical Analysis

Traders who engage in technical analysis study the movement of currency prices and often use historical data to try to predict future outcomes. The theory at work here is that the price of a currency already reflects the relevant and available market data and a simple study of price movements will enable traders to make informed and sound trading decisions.

Technical analysis relies heavily on market data from the Forex market itself. Traders interested in technical analysis depend on Forex charts and graphs to forecast when a particular currency is likely to dip in terms of value. This is where charts become important tools of the trade, as they are employed to establish patterns and identify as a route to securing opportunities for profit. Technical analysts search the Forex markets for recognisable trends and advocate the identification of these trends as early as possible as the route to success.

This would be an indication to traders who hold the currency concerned to sell. Technical analysis can also be used to try to determine when a currency has bottomed out. From there, it can only rise, so traders should buy. Technical analysis is performed using far more than the price of a currency as a data point. Just as essential is the volume of trading; with many technical analysts believing that volume data is a reliable indicator of investor interest in a particular currency.

Which is Best?

There is no right answer. Technical Analysis is generally preferred by most traders because it involves following trends and charts and is capable of covering a good number of currency pairs, as opposed to Fundamental Analysis which can mean wading through a considerable amount of market data that is relevant to a lesser number of currency pairs.

Why Forex Rates Fluctuate

Currency Rate Changes

The currency rates in the foreign exchange market change daily, and can often change several times during the day. There are several reasons for the fluctuations, but professional and private forex traders make their profits by basing their trades around changes in currency valuations. Since the forex market is a 24-hour global market, currency rates are subject to frequent changes, according to the economic, political, and social conditions in each country that participates in the market.

Market Conditions

Conditions within the forex market are one factor that may affect currency rates. If one country’s currency rises or declines sharply during trading, this can influence the relative value of other currencies. As an example, if the Japanese Yen grows in value overnight due to the strength of the Asian markets, the value of Western currencies such as the United States Dollar (USD) and the British Pound (GBP) may decline simultaneously. Conversely, if the British Pound’s value rises suddenly, this may cause the value of other currencies to decrease.

Economic Indicators

A nation’s economic outlook also has a strong impact on the value of its currency. The country’s gross domestic product, the national unemployment rate, the amount of debt a country owes to other nations and the projected future for the economy all influence the worth of the national currency.

National Stability

Countries that are experiencing strong political or social upheavals generally have weak currency values during these times of change. Areas of the world where the government or the financial industry is in turmoil may be considered high-risk environments in which forex traders may not want to invest. When these events happen, traders who are holding currencies in these countries may sell their shares quickly, causing the value of the currency to go down.

Trading the Forex Markets

Online trading has grown along with the internet and the old stereotype of wealthy, cigar smoking businessmen gathered around a ticker tape machine has given way to a new style investor. Today’s investor is likely to be a blue-collar worker, a stay-at-home mum or a pensioner. All investing has seen an increase and with the advent of the smartphone, trading can be carried out anywhere, anytime, but none is more popular than forex.

For the many people who are interested in forex or the foreign exchange market, but are confused about the cost, here is a brief explanation about who gets paid and how. If you manage your account yourself, which is quite doable, you pay no fee or commission. Of course, brokerage firms have to make money and the most common way in which they do that is with pips.

Currencies prices are always quoted in pairs such as EUR/USD and the price of one currency against the other is expressed to the ten thousandth or fourth decimal place. One ten thousandths of a country’s standard currency is a pip. The difference between the selling price and the buying price is called the spread and is measured in pips. If one is buying Euros and the price in US dollars is 1.344 to buy, but the seller is receiving only 1.340, then the broker receives four pips in the transaction. Some brokers also charge a commission; in which case their spread should be smaller.

Managed accounts, in which the investor prefers to have someone else make the investing decisions, are subject to the spread, as well as a commission on profitable trades. Trades who lose money are usually charged a commission. Investors make money when currencies they acquire increase in value and currencies they are trading away fall in value.

Trade Forex Safely with Limits

Trading forex is not just about buying and selling currency pairs in the hope of making a profit. There are rules and tools for traders to use to help make trading not only easier, but also safer. Many investors have busy schedules, which may prevent them from having 24/7 access to their accounts. Should the market suddenly change, a particularly volatile currency pair could result in major losses if left unmanaged for even a few hours. To prevent this from happening, you should always set limits on your positions.

When you set up a trade, minimise any potential losses by using a stop/loss order, also referred to as a stop order. You choose the level at which you will exit the position automatically if the currency drops or rises above a certain value, depending on your position. By doing this you will only be liable to lose within the limits you set. The closer you set the stop/loss order to the original currency value, the quicker the position will be exited when the value changes, which can also minimise gains. Therefore you should set a moderate level, which allows for normal currency fluctuations.

You can also protect against sudden or unexpected losses, caused by major fluctuations, by setting a limit order. You automatically exit a position once your profits or currency value reaches a predetermined level. This should be set much further away from the original currency value. Setting a limit provides a safe way to exit while guaranteeing a profit.

What is a stop loss order?

Trading forex doesn’t just require skill. A willingness to learn is also essential, as is the courage to carry out convictions, and the ability to make the right decisions under pressure. Occasionally, the right decision is to stop a trade before it causes too much damage.

As a basic rule, traders should not risk more than they would be comfortable to lose on a trade. Occasionally losing is all part of the rollercoaster ride of being a forex trader. Risking too much will backfire eventually, so it’s essential for traders to avoid becoming greedy.

A stop loss order is an instruction given to the broker to sell a position if it drops in value to a specified point. It is effectively a damage limitation option, and a way to avoid catastrophic losses. There is a fine art to placing stop loss orders. If placed too low, losses can mount quickly, but if the stop is placed too high, the trader may miss out on a market rebound.

A limit can also be placed at the trader’s preferred upper limit. This can ensure that the trader benefits from rises in the market, and avoids becoming too greedy.

It’s a good idea to practice placing limits and stop orders. Traders can either set up a demo account, or simply make a paper note of the trades they would have made. The progress of these trades can then be monitored to see whether the limits would have been triggered or not.

How to be Successful in Currency Trading

Currency Trading, also known as Forex or foreign exchange, is one of the world’s fastest growing and largest markets. It allows businesses and individuals to benefit from fluctuations in exchange rates, by purchasing a currency when its value is decreased and then selling it when its value has increased. The profit achieved will be the difference between the buying and the selling price.

One key way to encourage success in currency trading, which many individuals, especially inexperienced ones, forget is to only buy currency when its value is low. This leaves plenty of potential for the value of the currency to increase, therefore leading to a profit. If a currency is both bought and sold when its value is high, there is a lot more potential for its value to drop, therefore leading to a loss.

In order to boost success, forex traders should always have a trading plan and stick to it, so that they remain in control throughout the trading process. For example, they should pick a pair of currencies and before doing any trading, they should decide when they will buy the currency and at what value they will sell it. They should also decide how long they will wait before selling the currency if its exchange rate goes down, in order to minimise their losses.

Finally, one of the main ways for novices in the Forex market to encourage success is to build up their trading gradually. They should start with one of the major currency pairs, for example the US Dollar and Pound Sterling and learn as much as possible about it and have plenty of experience in trading it, before moving on to other markets.

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