How Forex Spread Betting Works?

When you think of trading Forex, and the possibilities that it has for profit, does spread betting come to mind?  Most of us think of the much publicized standard Forex online markets, which include pre-specified “lot” sizes that tell you how much currency you are trading. But Forex spread betting can combine the leverage and simplicity of true Forex trading with the flexibility to name your own price, or how much you want to bet.

The Forex market is much simpler to understand than any stock market with its thousands of shares. There are only so many currencies, after all, and the trading consists of buying one currency with another, so it always involves pairs of currencies. In fact, it can be even easier than that, as there are only four main currency pairs involved in the majority of Forex trading. These are –

  • GBP/USD – pounds sterling v. the U.S. dollar, which is sometimes called “cable”,
  • EUR/GBP – the euro v. sterling,
  • EUR/USD – the euro v. U.S. dollar, and
  • USD/JPY – the U.S. dollar v. the Japanese yen.

There are a few other currencies, such as the Canadian dollar and the Australian dollar, which have some familiarity to the currency trader, but most of the others are ranked as “exotic” currencies, which have their following in some circles but are traded much less.

Although you must always check with your spread betting provider, it is usual to bet in units of a “pip”, a Forex term standing for “point in point”, which is the same thing as a percentage of a percentage, or numerically 0.0001. When you bet, perhaps £1 per unit, you win or lose £1 for every 0.0001 change in price.

If you are familiar with spread betting other financial products, then that may be all you need to know, but if not, then spread betting is simply betting on a price going up or down, and it is equally easy to place a bet either direction. The bid-offer spread is the difference between the price quoted for betting it will go up, and the price quoted for betting it will go down, and you close your bet by taking the opposite bet, so you will always pay the spread to your spread betting provider on a completed round-trip bet – this is his commission for the trade.

Here’s a Forex example. Your spread betting company is quoting cable at 1.5860/1.5863, and you think the pound will strengthen against the dollar. This means you want to place a “buy” spreadbet on the currency pair, which you can do at 1.5863. It’s important to get this the right way round, so note that you “buy” when you think the first currency is going to get stronger in relation to the other, and “sell” if it’s the other way round. You bet £1 per pip. In a few days, the quote is 1.6154/1.6157 as the pound did get stronger, and you sell, at 1.6154, to close the bet. You have made (16154-15863) x £1, which is £291.

Forex spread betting works out well, as it doesn’t involve you taking out a separate account; your spread betting provider will usually take bets on whatever major financial instruments you want. And as you can name your own price, setting your own odds, it is a great way to trade in currencies.

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