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.