To be successful with Spread Betting it is important to understand at least the various spread betting markets available today.
Spread betting can simply be defined as a bet on a future result or an outcome. Money is made by choosing the correct outcome for a particular bet instrument. The outcome is determined by the underlying market price of a bet instrument.
This article will explain the real basics of currency spread betting and provides a simple example.
Currencies are the largest liquid financial market today and can be very risky. However, if you manage your risk correctly, profits derived from currency trading can be worth the while.
Currency spread betting is similar to your traditional foreign exchange trading and is primarily based on at least the performance of two currencies and how both effect one another. The most popular and most active traded currency pairs these days are the USD/GBP, USD/EUR, USD/JPY and USD/CHF. For those not familiar with currency symbols, USD refers to the United States Dollar, EUR to the European Euro, JPY to the Japanese Yen and CHF to the Swiss Franc.
With spread betting you can bet on whether a currency will strengthen (going long) or weaken (going short) compared to the base currency.
Take for example the USD/GBP currency pair where the USD is the base currency. If the entry USD/GBP (1 USD =? GBP) price is 0.6366 when you place a spread bet order, and you believe that the GBP will strengthen, you can wager $ X.XX amount per decimal movement in the price buy placing a SELL order (you believe the price is going to fall).
If the GBP did indeed strengthen and the USD/GBP was say 0.6100 three hours from when you opened the trade, your profit will be based on what you wagered multiplied by the decimal spread movement. In currency trading one decimal/basis point movement is also referred to as a “pip”. If you bet $ 1.00 on a decimal movement and you expect the GBP to strengthen then your unbooked profit will be:
6366 – 6100 = 266 x $ 1.00 = $ 266.00
Remember that (for the example above) if the market moved towards the GBP weakening and you bet on the GBP strengthening, you would make a $ 1.00 loss for every decimal movement in the opposite direction of your entry trade price (0.6366). If the USD/GBP moved towards 0.6632 your unbooked loss would be:
6366 – 6632 = -266 x $1.00 = $ -266.00
Take Profit and Stop Loss Levels
Spread betting platforms should show you your live unbooked profits and losses for every open trade. It is normally up to you to instruct the betting platform when you would like to book a profit or loss.
You can close trades manually or give automated instructions beforehand. For example, you can when you place your bet set a “Take Profit” value so that the betting platform can book your profit when a market instrument moves in your direction and reaches your desired take profit value. You should also be able to set a “Stop Loss” value to instruct the platform to close your order when the market moves against you and you do not want to lose your entire position.
Most spread betting platforms attempt to fully or partially insure you and them against a potential loss. The value of this insurance is determined when you open a trade and is referred to as the ‘margin’. The deposit margin will usually ensure you have enough reserved funds in your trading account to cover any potential losses that might occur if the market moves against you and your order is ultimately closed out.
The margin is calculated automatically based on various factors internally known to the betting provider. Some of the factors include a percentage of the value of your opening bet, the stop loss value you set as well as the volatility of the chosen market or instrument.
When a trade is closed manually or automatically, your reserved margin is released to your account for offset against any profits or losses booked against your account.
The deposit requirement usually set by spread providers for a trade within a new betting account is equal to the maximum loss for that particular trade. This means the maximum you can lose equals the deposit margin. However, certain betting providers allow more experienced traders to lose more than the initial margin without closing the trade. When this happens, betting providers will usually issue margin calls forcing traders to top-up the initial margins.
Currency spread betting will always be risky as you are betting on a future outcome.
Do not attempt spread betting without having at least basic knowledge of how it moves, what affects it, any underlying volatility and any forthcoming market announcements that may have an impact on prices. The key to currency trading success is to ensure you have enough knowledge to react quickly to various market news and announcements.
This type of trading carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.