How to spread bet

Spread betting on forex may seem a daunting exercise from the outside, but we're here to simplify it for you as much as possible and explain why over $5 trillion flows through the forex market every day.

Understanding the basics

In order to trade forex, you have to trade two currency pairs against each other (for example EUR/USD - the Euro vs US dollar). In this pairing, EUR is known as the base currency, and USD as the quote currency.

Base Currency

Quote Currency

You would speculate on whether the base currency will strengthen (appreciate) or weaken (depreciate) against the quote currency. If you think the base currency will appreciate, then you should go long (buy), and if you think the base currency will depreciate, you should go short (sell).

After choosing whether to go long or short, the currencies will fluctuate based on multiple factors until you decide to close the position. This will determine the profit or loss you make on the trade.

Influencing factors on the forex market

There's number of reasons why forex pairs move so much (this movement is known in the industry as volatility.) Here's a few volatility-causing factors you should be aware of when forex trading:

Financial news events

Large financial news events, such as budgets, interest rates and unemployment announcements can significantly increase volatility in the markets, especially in local currencies where the announcement is being made.

Political economic stability

The welfare of a country or nation can have major impact on the performance of a currency. If a country is struggling economically, it's extremely likely its associated currency will be too.

Natural disasters

As horrible as they are, natural disasters can affect a currency's wellbeing as well as people's lives. Should an earthquake or tsunami occur, expect some sort of volatility to be generated in the currency associated with that region.

Points mean profit (or loss)

In spread betting, the movement of a market is measured in points. The amount of points a market moves determines how much profit or loss you’ll make in a trade. Whenever you open a trade, there will be a difference between the bid and ask prices – this price difference is known as a spread. The market will need to move a certain number of points so that it passes the bid or ask price before you can earn any profit. You’ll need to factor this in when placing a trade, but luckily for you we offer highly competitive spreads across all markets to try to maximise your profit. Also don’t forget that spread betting is currently exempt from both UK Capital Gains Tax and stamp duty*, which can further increase your potential profit.

Trade rising and falling markets

Unlike traditional shares trading, in financial spread betting you have the possibility to trade both a rising and falling market. Should you think the market will rise (appreciate), you can buy (go long), and similarly if you think the market will fall (depreciate), you can sell (go short). Should the market move in favour of your trade, you will earn a profit. However, should the market move in the opposite direction, you will incur a loss.

Risk warning: losses can exceed your initial deposit. Please ensure you fully understand all risks involved and seek independent advice if necessary.

Spread bet examples

Here’s a couple of examples of how you can make a profit or loss from spread betting:

Example One

We identify a pattern in GBP/USD (Cable) and decide to buy 2 pounds per point of Great British pound (GBP) against the US dollar (USD) at a price of 1.4330.

The margin required for the position will be 2* (1.4330 * 10 000) / 200 = 143.3 GBP.

The market starts moving in our direction and we close for a 30 pip profit at 1.4360.

Since we’re trading at 2 pounds per pip, the profit for this position is 30*2 = 60 GBP

Example Two

EUR/USD is stuck in a range for three days, and close to the bottom of the range. We want to buy at this short-term support level.

We buy 4 pounds per point of EUR/USD at 1.1050

The margin for the positions will be 4* (1.1050*10 000) / 200 = 221 GBP.

To protect ourselves against a breakout of the range to the short side, we place a Stop Loss at 1.1010

During the US session, a news announcement brings some volatility to the markets causing the EUR/USD to break the range to the downside, taking out our Stop Loss.

We had 4 spread bet contracts, so the loss we made is 40 pips * 4 = 160 GBP

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Losses can exceed deposits

Losses can exceed deposits. Ensure you fully understand all risks involved and seek independent advice if necessary.

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