Spread Betting on Currencies (Forex)
Spread betting is also commonly used as a means of trading in currency. The currency markets are the largest globally by trade volumes, with trillions exchanged on a daily basis as investors, governments and companies look to make the most of their money. Used for hedging, investment and sheer price speculation, the currency markets are fast paced and highly volatile at the best of times, and when spread betting is thrown in the mix, the model becomes even more lively. For short-term traders looking to make a quick profit, this is good news – fast moving markets mean more action for traders, both positive and negative.
Aside from spread betting, forex trading tends to be highly leveraged anyway as a rule, although the costs of financing this leverage are deductible from trading profits. In that sense, financial spread betting provides a degree of detatchment from the currency transaction, using currency pairings as an index for quoting spreads rather than trading in the currency directly. This mitigates the costs of financing leverage, because leverage in spread betting is inherent in the DNA of the transaction – one point movements equates to one multiple of your stake, and this proportion of leverage remains unchanged. With only the stake amount variable, spread betting is arguably a much less intimidating marketplace for traders to engage with the currency markets, and allows speculation on currency prices without the hassle and pressures of funding leverage.
Why Spread Bet on Forex
Spread betting on currencies, as with most other bases of spread betting, needs only micro movements in the underlying market to deliver a significant profit. A spread betting position that moves two points will yield a 200% return, whereas the picture with regular forex trading is much more complex and costly. The financed portion in forex trading has to be accounted for, given that it is provided by the broker, and interest charges continue to accrue the longer you hold out on your position. Spread betting on the other hand builds all its trading costs into the broker’s spread, usually no more than a few points, and assuming you don’t want to carry positions overnight, this can be a more cost-effective way of trading the markets.
Spread betting on currencies is designed for the short-term, and provides easier access to the forex and other major markets through one simple platform. The elegance and simplicity of the spread betting transaction should not be underestimated – in refining the trading process and delivering easily calculable returns and risks, traders can more readily turn their attention to the business at hand – identifying profit opportunities as they arise.
How To Spread Bet on Currencies
Currencies tend to fluctuate on the basis of domestic and international economic considerations. Always quoted in pairs, currencies will rise or fall against their counterparts depending on the economic decisions of the relevant authorities, and indeed the international approval of the home economy in the form of supply and demand for that particular currency. Consider the example of the UK. If the UK raises interest rates, this will generally translate into a higher return for savers in UK bank accounts. For investors managing substantial portfolios, including large institutional investors like hedge funds and pension funds, this might present a more attractive or more stable return for their clients, prompting them to buy pound sterling, in the form of a UK bank deposit. If the currency rate strengthens even more, selling sterling will deliver a capital gain, in addition to the ongoing yield delivered by the savings rate of interest. And as more investors buy sterling, demand will increase and push its price in comparison to other major global currencies skyward.
This leads to a couple of pretty significant conclusions. Currency markets, like any other, are driven by supply and demand, and the factors which prompt supply and demand considerations are wholly economic. If a government prints more money, known as quantitative easing, the value of the currency will fall because the money supply has been increased. If the UK looks like a safe economic prospect, investors will deposit there for the stability and security of returns that can be provided. As a trader, it’s up to you to identify the economic triggers on a particular day that could influence other investors to bid up or sell down a particular currency pair, through a combination of technical price analysis and an interpretation of current economic and political affairs.