Spread betting forex is a type of spread betting that includes predicting the price movement of currency pairs. In forex, spread betting is about opening a position based on your speculation (if it will rise or fall) of a currency pair’s price. If the market moves in your favour you will end up in profit; otherwise, in loss, if the opposite is true.
Along with contracts for difference (CFDs), spread betting forex is one of the most common methods for trading forex. Since the foreign exchange market is the largest and most liquid in the world, online currency trading is famous among all traders, including beginners and professionals.
Online trading platforms generally provide more than 300 forex pairs, including major forex currency pairs such as the EUR/USD and USD/JPY and minor and exotic crosses.
In this article, I will share my knowledge on spread betting forex in detail. I will also cover some key pros and cons of spread betting at the end.
Forex spread betting is a method of speculating on the price movements of currency pairs. While spread betting on a currency pair, you will stake a certain amount of money per point of movement in the underlying market. If the price moves in the direction you predicted, you’ll profit; if it moves in the opposite direction, you’ll suffer potential losses.
Assume you open a long-spread betting position on GBP/USD when the buy price is 13259.1, betting £5 per point of movement. Your prediction is correct, and you sell at 13279.1. Because the market has moved 20 points, your profit is £100 (£5 x 20), excluding any additional costs such as overnight charges.
Spread betting is a derivative product, which means you’re trading using leverage rather than directly owning any currency. Leverage trading also means that you just need a small deposit (known as a margin) to open a larger position.
However, because your total profit or loss is based on your position’s total size, either might significantly outweigh your margin amount.
Like spread betting, CFD trading is another way of trading in the forex market. Spread betting gives you more control over deal size, but forex CFDs can only be traded in specific deal sizes, known as lots. Spread betting is also tax-free in some nations like the United Kingdom.
The spread, bet size, and bet duration are the three main components of spread betting. The spread is the charge you will pay for a position, the bet size is the amount of money you wish to put up per point of market movement, and the bet duration is how long your position will be open until it expires.
The spread is the difference between the buy and sell prices wrapped around the market price of an underlying asset. They are sometimes referred to as the offer and bid. The costs of every given trade are divided into these two prices, so you’ll always buy slightly higher than the market price and sell slightly lower.
The bet size is the amount you wish to bet per unit of underlying market movement. You can bet whatever size you like as long as it is less than the minimum accepted for that market. Your profit or loss is calculated as the difference between the market’s opening and closing prices multiplied by your bet amount.
The underlying market’s price movements are measured in points. A point of movement can represent a pound, a penny, or even a tenth of a penny, depending on the liquidity and volatility of your chosen market. You can find out what a point means in your chosen market on the deal ticket.
The duration of your bet is the length of time before your position expires. All spread bets have a set timeframe, which can range from one day to several months. If the spread bet is open for trading, you can close them at any time before the specified expiry time.
Generally spread bet duration includes:
These bets are open for as long as you like, with a default expiry date in the distant future. They have the tightest spreads but offer overnight funding. Therefore they are typically employed for short-term positions.
These futures bets expire at the end of a quarterly period, but they can be rolled over into the next quarter if you notify them in advance. They have wider spreads, but lower funding costs integrated into the price, making them suitable for longer-term prediction.
Before heading further, there are a few things that all traders should understand about forex as a market and spread betting as a trading method. Here are the five points to know:
Forex (FX) is a market in which we may trade. Opening a spread betting account is one way to gain exposure to the FX market – and thousands of other markets – without actually purchasing any currencies or other assets.
When trading forex (through spread betting or any other method), you are always trading one currency against another; therefore, they are traded in pairs. For example, instead of trading the dollar, you’d trade the British pound’s value against the US dollar (GBP/USD).
You buy one currency and sell the other in the pair based on whatever currency you believe will appreciate in value versus the other. The currency being bought is called the base currency (seen on the left), while the other is referred to as the quote currency (appears on the right).
The price of the pair shows how many quoted currencies are required to buy one of the base currencies. So, if the GBP/USD rate is 1.42000, it costs $1.42 to buy £1.
Because spread betting is leveraged, you will only speculate on the price of a currency pair, but you will not own the physical assets. Furthermore, you will only put up a percentage of the trade size, say 5%, at the start of a trade. Leverage can magnify your profits and losses based on the full position size rather than your deposit amount.
For example, if your total position size is £100 and the margin factor is 5%, you would only need to deposit £5 to open that trade. However, because your total profits or losses for the trade are calculated on the full £100, losses might quickly outweigh your £5.
There are no deal size restrictions when spread betting on forex. However, while trading forex CFDs, you must trade in lots (100,000 units of the base currency is a standard lot). Spread betting is available on a variety of forex markets, including spot forex, forwards, and options. Generally, all three are available for trade with many brokers.
Spot (cash) forex trading is the trading of currencies in real-time, whereas forwards and forex options allow you to buy or sell currency at a predetermined price and on a predetermined expiry date.
Forex forwards are derivatives that give you the obligation to buy or sell a specific currency at a specific price on a future date.
Option options allow you the right, but not the obligation, to buy or sell currency pairs before the specified expiry date. Unlike spot market forex, which is based on current prices, you can trade daily, weekly, monthly, or quarterly. Read more on what forex trading is.
Several forex spread betting strategies are used in the market, with some particularly profitable when trading in the short term. These include trend following, news trading, forex scalping, and hedging forex, the latter of which is a way of protecting currency risk.
Before you start trading, you should first brush up on your spread betting knowledge. You must learn about spread betting and strategies and how to apply them to all markets, including foreign exchange.
Note down a reliable source (a website) with a dedicated team of market analysts who give daily updates on the financial markets in their news and analysis section.
It is beneficial to plan your entry and exit the forex market with a sound trading strategy. This improves consistency while removing emotion from trading decisions, which may frequently end in rash decisions.
Risk management precautions should be part of your trading plan. It is also essential to set a limit on how much money you are willing to lose and stick to it. Stop-loss orders are risk management tools that specify an exact price for closing your position if the markets move against your spread bets.
Since the forex market is known for its volatility and rapid price movements, this tool will assist you in limiting your losses.
Forex leverage comes with several risks that all traders should be aware of ahead of time. Spread-betting forex on leveraged positions will compute losses at full trade value. It means that profits might be magnified if the markets move in your favour, but you may lose all of your capital if the markets move in the opposite direction.
Depending on the assets and how long your positions last, you may also have to pay spread betting holding costs. In certain cases, these costs might exceed the profits generated on your account; hence, it is a must to deposit enough funds in your account to cover any holding costs.
The most prudent forex spread betting traders understand what forex spread betting is and how to trade forex using spread bets.
The first step is to learn how both work. Following that, look for free yet dependable resources that explain and educate on forex for all levels of experience, from beginner to advanced.
Finally, use any broker’s free demo account to gain confidence and hone your skills by practising with virtual funds.
After learning the basics of spread betting on forex, the next step is to open and fund your live spread betting account. For that:
There are several currency pairs to select from, with most brokers offering over 80 major, minor, and exotic pairs for spot markets and more than nine options.
Before trading an FX pair, you should conduct a fundamental and technical analysis of the two currencies in the pair. This means you should assess how the ‘base’ (the currency on the left) and the ‘quote’ (the currency on the right) move in relation to each other.
You may spread bet on forex in a variety of ways:
You’re ready to start spread betting on forex once you’ve opened a live account with a reliable broker. Navigate to the spread betting trading platform and select whether to buy or sell your preferred currency pair.
You’d buy the pair if you expected the base currency’s value to rise versus the quote currency. If you expected it to do the opposite, you’d sell.
Finally, before opening a position, set your stops and limits. Stops and limits are important risk management tools in the forex market since they prevent potential losses you aren’t comfortable with.
After you’ve opened your position, you may keep track of it via the platform’s ‘open positions’ section. Once your position is open, keep up to date with your broker’s platform’s newsfeeds, trading signals, and trading alerts. You may also set price alerts to receive an email, SMS, or push notifications when a certain percentage or point of buy or sell is reached.
Spread betting firms make money from the spread and do not charge a fixed commission. This means that all costs bound with executing a position are included in the trade’s profit and loss, and there are no additional brokerage fees to consider.
This is probably the most obvious benefit of this type of trading. Unless spread betting is your sole source of income, all profits from this activity are currently tax-free in the UK.
This can significantly increase your trading business’s bottom line, not least because you’ll have a greater compound return, but only if it isn’t eroded by the additional costs associated with spread betting.
The margin is the amount of money a trader must have in their account to keep a position open. For spread betting, this is frequently as little as 10%, meaning that with £10, you may hold a position in a market trading at 100 points at £1 per point.
The remaining 90% is “borrowed” from the spread betting firm, and as such, it generates fees, not all of which are included in the spread. Although the margin requirements may be higher, many additional derivatives can also be traded on margin.
Unlike other derivatives, where the value of a contract is fixed, spread betting allows the trader to select how much each tick/pip is worth by choosing the exact size of the bet. Usually, this is stated as ‘pounds per point.’
The position sizing benefits of this and the improved capacity to compound returns and build the equity curve exponentially should not be ignored.
Whereas a single futures contract trader would need to double their account before trading two contracts, a spread bet trader may increase their account by, say, 25% and increase their position size by 25%, trading in the equivalent of fractions of a contract. This significantly speeds up the compounding process, resulting in a smoother equity curve.
Shorting individual shares and exchange-traded funds can be complicated because the stock must first be borrowed before it can be sold; with spread betting, entering short simply involves a bet that the price will fall and is accomplished with the click of a button in much the same way as entering long.
When compared to other derivatives such as options, financial spread betting is relatively easy to understand. As a result, it may be an excellent choice for beginner traders, even if they eventually decide to trade other products.
The spread, which is the main trading cost of spread betting, can be more expansive when the underlying market is traded in low volumes. This is due to the spread betting firm’s desire to acquire an equivalent position in the underlying; therefore, the spread will also be wide in this case. These costs are passed on to you, the trader.
Even with a good technique, one of the first obstacles for every trader is overcoming costs, particularly for day traders and scalpers who have a lower average profit per trade. Spread betting normally costs more than trading futures contracts since the spread paid is frequently greater than the futures spread and commissions combined.
GER30 - Now consists of 40 blue chips stocks — 2023Spread betting is a more sustainable business for traders who hold positions for many days or more, as spread costs have less of an influence on trading success.
In much the same way as your spread bet profits are tax-free in the UK, losses that you incur as a result of financial spread betting cannot be offset against capital gains for purposes of taxation.
Spread betting is not suitable for long-term investors because the various costs involved with keeping a spread bet open for a longer period of time – rollover and maintenance costs – are expensive.
Spread bets, like futures contracts, have an expiration date, and if you want to renew your position after that date, you will often have to pay a “rollover” cost.
You are not entitled to receive dividends or other profits distributions since you do not own the underlying investment.
The prices displayed by a spread betting firm are not those of the underlying instrument. Because the spread betting firm “makes the market” for each price stated, they are free to set that price as they see fit, regardless of what is going on in the underlying market.
Most spread betting firms describe a price quote that reflects the Dow Jones Industrial Average index as “Wall Street” – though similar, the price fluctuations will not perfectly mimic those of the index, the YM futures contract, or the traded DIA exchange fund, for example.
One disadvantage is that this may limit your charting options to the spread betting company’s platform, as these are the only prices that will match those that are actually available to you as a spread bet trader.
Spread betting forex has its own advantages and disadvantages. No matter if you are a beginner or a professional trader, you must extensively go through your risk management strategy and follow a strict trading plan. Learning is the key to success, so never stop learning!
A demo account is one of the best tools to practice spread betting on the forex market. Move to the live account once you are confident and find that your trading strategies are consistently working. Spread betting and CFDs have a lot in common, more than you might think.
When you hedge with a spread bet, you open a new position to offset any negative price movement in an existing position. This might be trading the same asset in the opposite direction as your current trade or trading an item that moves in a different direction than your current trade.
