Spread betting forex

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Questions about spread betting forex are some of the most frequent that I receive from users of the spread betting forum section of this website. That is not surprising since forex trading can be particularly exciting and potentially very lucrative...if you know how!

Before we delve into the intricacies of how best to approach spread betting forex, let's first review some background information. This should set the basis for a well-rounded understanding of the currency markets.

The foreign exchange market, also referred to as the currency market, FX market or forex market is the largest and most liquid market in the world, with average daily volumes in excess of $1.5 trillion.

Historically, the foreign exchange market has been the domain of large financial institutions and these players, including central banks, investment and commercial banks continue to play a dominant role in the forex markets. However, the big guns are being joined by large corporations looking to hedge their currency risks, global money managers and hedge funds looking to profit from market speculation, and increasingly, by small private traders often attracted by the potential rewards of spread betting forex.

Unlike the stock market where there is a central, physical location where the bulk of trading takes place, the forex market is essentially virtual, with no single central location for conducting transactions. The bulk of currency transactions take place between banks (interbank market) or other counterparties dealing over the telephone or using an electronic platform.

Features of the foreign exchange market

Liquidity: as stated above, the currency market is the most liquid financial market around. However, since forex is traded in pairs (such as $/£ also known as ‘Cable’ or the Dollar-Yen or Euro-Dollar currency pairs), it follows that some pairs are more liquid than others. Liquidity wanes once you go beyond the currencies of the major world economies.

Extended trading hours: the forex markets are almost always open. Trading takes place across the major financial centres, in overlapping trading sessions rolling from Sydney–Tokyo–London–Frankfurt–New York from roughly 9pm GMT on Sunday to about 10pm GMT on Friday pretty much non-stop. Consequently, there are no opening or closing prices as such. For this reason, when most traders talk about closing prices, they are typically referring to the close in New York.

For those keen on spread betting forex, the virtually unlimited trading hours can mean that profitable trading opportunities are plentiful. Unfortunately, this can be a curse in disguise sine it often leads to over-trading for those who do not have the required discipline.

Leverage: if you are remotely interested in spread betting forex, then you need to get a solid understanding of leverage and the risks it poses in spread betting. Lucky for you if you're a frequent visitor of www.spreadbettrader.co.uk as we provide extensive explanations of the key risks (and not just the potential rewards) of spread betting forex and other markets.

The key here is that spread betting forex involves substantial amount of leverage (ie you use a lot of borrowed money when you take up forex trading positions). Of course, while on one hand this means that you can quickly parlay a small sum into a much larger amount if you trade successfully, on the other hand, trading losses can mount rapidly too. Leverage is a double-edged sword therefore use it wisely. Bottomline, you should never risk more than you can afford to lose.

Long/Short trading: you can go long (buy) or sell short any traded currency pair. For instance, if you believe that the UK economy would strengthen and inflation would pick up thus necessitating further increases in short term interest rates while also believing that the US economy would falter with the consequent dampening effect on inflation and interest rates, then you may decide to back your assessment in the foreign exchange market by buying the British Pound against the US Dollar. if you are spread betting forex in such a case, you buy the British Pound against the US Dollar.

Price quotes in the foreign exchange markets

As with all other traded securities or financial instruments, forex prices display the bid and the ask. Perhaps the only immediate difference is that in the foreign exchange market, prices are typically quoted to four decimal places. The only major exception to this rule is the Japanese Yen which is typically quoted to two decimal places.

For instance, the USD/GBP (Cable) may be quoted as 2.0345–2.0349.

The quote above means that you can buy at 2.0349 and sell at 2.0345. As usual, the four-point (or ‘pip’ as it is referred to in the currency market) spread is the in-built profit for the broker.

If you enjoyed this article on spread betting forex, then check out other insightful articles below to hone your spread bettingskills

Financial spread betting process explained

Simple moving average tools can enhance your spread betting profits

Spread betting gaps in stock prices

Market timing enhances your spread betting profits

Relative strength is a grossly underrated but highly effective spread betting tool

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