Forex trading: practical spread bet examples
Practical examples of spread betting on forex
Currency trading using spread betting is best illustrated with the aid of examples. Below, I have provided two examples of trades using the dollar/sterling currency pair—a popular currency crosses traded by UK spread betters.
Scenario 1: Long (Buy bet) on $/£ (Cable):
It’s Saturday June 16, 2007 and you are looking through the forex charts trying to identify potentially profitable trading opportunities for the coming week.
Having done your homework, you decide that you like the look of the Cable chart. Moreover, the fundamentals are good as rising interest rate expectations continue provide upward support for the Pound Sterling against the US Dollar. You make up your mind to take a buy bet on Monday morning.
Additionally, you subscribe to the Market Timing Update and on Sunday evening, you receive the Market Timing Update for Monday June 18. Indeed, the forex section of that market research concluded that “…an analysis of price momentum suggests that the GBP should move significantly higher in the week ahead”—much in line with the view you had reached.
As at the close of trading on Friday 15 June, the Cable was quoted at $1.9756.
On Monday morning, the cable gaps higher further confirming your bullish view.
$/£ is now quoted 1.9824–1.9830 so you buy £3 per point at $1.9830.
You set your protective stop loss and go about your usual business.
Several weeks later you decide to take profits on your currency position for a number of reasons. Your latest analysis suggests diminishing bullish momentum in the Cable and you believe that the Dollar may be due for a corrective bounce.
Furthermore, the currency section of the latest edition of the Market Timing Update also highlights the potential for a pullback in prices.
$/£ is now quoted 2.0520–2.0526
You decide that you have had enough and close your trade by selling £3 per point at 2.0520.
Your profit for the Cable trade
Your profit for the trade is simply the difference between your buy price and your sell price, multiplied by the stake (i.e. the £ amount per point, in this case £3)
Your total profit = (2.0520 – 1.9830) x £3 = 690 x 3 = £2070
Notice that although the Cable is currently trading at 2.0523, you are only able to trade at 2.0520. The six-point difference between the quoted prices 2.0520–2.0526 is the spread. This is the direct cost of financial spread betting that traders bear and it is where the spread betting companies make their money.
As this practical example demonstrates, forex trading using spread betting can be very lucrative. The wide trading ranges and persistent trends seen in forex markets enable trend-following and swing trading approaches to financial spreadbetting to prosper. Nevertheless, the potential profits that can be made should not be misinterpreted as get-rich-quick opportunities since you could have lost just as much if you had held on to a losing trade in the opposite direction of the one shown above.
If you enjoyed this article on forex, then check out the articles below to hone your spread betting skills
Trading currencies using spread bets
Effective stop loss and trade management strategies for spread betting
Financial spread betting process explained
Simple moving average tools can enhance your spread betting profits
Spread betting gaps in stock prices
Trader emotion and spread betting performance
Market timing enhances your spread betting profits
Relative strength is a grossly underrated but highly effective spread betting tool
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