Many people extol the benefits of trading on the Forex markets, with high leverage and easy-to-understand trades. When you are spread betting on Forex, you have similar benefits, but also get the advantage that you can use one account for all your trading in any financial security. You get involved in the exchange rate just far enough to see which way to bet, but do not have to worry about converting currencies with your trading capital, as all your bets are placed in your base currency.
By far the most popular currency pair involving the euro is the euro/dollar (EUR/USD), which is to be expected given that the USA and European Union between them account for over 45% of global GDP. Let’s take the greenback popularly known as the world’s reserve currency. In the aftermath of the credit crunch, currency markets have become much more sensitive to the state of individual soverign countries’ debts as opposed to economic growth. If the USA continues to expand its $1.1 trillion deficit and print more dollars; the dollar could come under selling pressure.
Take for example spread betting on the currency pair EUR/USD (euro v. US dollar). You may have an opinion on which currency is stronger and want to back your view. Whichever currency it is, the spread bet is just as simple, but you have to be clear so that you do not get caught out. When you place a “buy” bet, or “go long”, if you were betting on any other financial instrument it would mean that you expect or hope that it will go up in value. For foreign exchange it means that you want the first named currency, in this case the euro, to go up in value against the other, the US dollar. With a short or sell bet, you are betting that the first named currency will fall in value, in other words it is the same thing as betting that the second currency goes up.
The EUR USD is one of the major currency pairs, with about a quarter of all foreign exchange trading involving this trade. Forex itself is the ultimate market for liquidity, with about 4 billion dollars worth of trading every day, which is much larger than the world’s stock markets combined. So the market is unlikely to be directly manipulated or affected by traders, or by anything other than genuine causes such as trade figures, unemployment reports, interest rate changes, inflation, etc. If you are serious about trading this pairing regularly, you will make a note of when the reports are due to be issued for each currency, so that you can be prepared for any movements.
The current cloud over the euro would probably cause you to think that it will sink against the US dollar over time. The American economy seems able to maintain a certain level regardless of what it “should” do, and there have been suggestions of stock market manipulation to inflate the recovery. When you are spread betting or trading on the financial markets, it is important to base your bets on what is happening, not on what you believe should happen. Always remember that you must follow where the market leads, and not expect it to follow your hunches. A chart can be useful here because even if fundamentals tell you that the euro is likely to weaken, you might want to take a look at the chart to check if the market has already accounted for this. The chart may reveal the euro has already been oversold and become too risky to sell.
Because there is so much trading going on in Forex, even though there is no chance of manipulation there is plenty of scope for the market to make big swings in response to international pressures. This means that you must always be ready to close out your bet if it becomes apparent that you have misread the market and it is going against you. Spread betting properly executed is not a game and should not be a gamble. The fact is that every Forex transaction has two sides, so when you bet on the price going one way there is another willing trader who is betting on the opposite direction. It is only by arming yourself with the best information and training, and exercising discipline in your spread betting, that you can consistently do better than the casual trader.
Spread Betting on the EUR/USD Rolling Daily
The EUR/USD exchange rate is a very popular combination for traders, and because it spans the Atlantic, the countries involved are open for business for a large part of the day, which means that economic news and other events that can affect the rate are happening much of the time. The daily rolling bet automatically rolls over the bet each day, in the evening. IG Index has a variation on this, called the Daily Funded Bet (DFB) which does not specifically roll over but provides a funding adjustment to your account each day. The price at the moment is 13066.1 – 13068.1.
If you think that the Euro is getting stronger, and will increase in value versus the US dollar, then you would take a “long” or “buy” bet out at the price of 13068.1, staking say £5 per point. If you hold the bet overnight, it will have the adjustment applied to your account, or interest if it is a daily rolling bet. Say that the price goes to 13123.2 – 13125.2, and you decide to cash in your bet. Here is how you can work out what it is worth.
- The opening price for the long bet was 13068.1
- The closing price was 13123.2
- Therefore you gained 13123.2 minus 13068.1 points on the bet
- This works out to 55.1 points
- Your stake was £5 per point
- Multiplying out, your winnings were £275.50
While you held the bet open there would have been slight adjustments to your balance, whether by direct interest charges or otherwise as with the DFB, but they are usually minor in comparison to the winnings.
It is important to realize that the price can also go in the wrong direction to your bet. Despite some claims, no-one can really predict that with certainty, so you have to be prepared to lose sometimes. Say that the price dropped to 13027.1 – 13029.1, and you decided that you had better cut your losses, so you closed your bet.
- The opening price was still 13068.1
- The closing price was 13027.1
- Therefore you lost 13068.1 minus 13027.1 points
- Which is 41 points
- At a stake of £5 per point, you have lost £205.
On the other hand, in the first place you may have decided that the US dollar was strong, and wanted to bet on the dollar increasing in relative value. In this case, you would “sell” or take a “short” bet, which would be at the lower price of 13066.1. This is because the US dollar is named second in the pair – in effect, you are betting against the Euro in comparison. If you bet £4 per point, then it could go like this –
You close your bet for a win when the quote is 12987.2 – 12989.2. It closes at 12989.2, giving you 13066.1 – 12989.2 = 76.9 points, which would be worth £307.60.
Once again, sometimes the price will go against you. If it goes to 13097.6 – 13099.6, you might close your bet before the loss became too large. The number of points you lost is 13099.6 minus 13066.1, which is 33.5, giving you a loss of £134, again with some other daily adjustments.
Spread Betting on the EUR/USD Futures
Futures bets are similar to rolling daily bets, but do not have interest charged each night. The bets are based on the futures expiry date so the interest up to that date is built into the spread. This means that futures bets are fine if you want to wager on the overall trend of the market for a few months. You don’t get interest charged each day, but when you come to close your bet you’ll notice the effects of the larger spread on your profits.
For instance, the forward EUR/USD is quoted at 13,062.3 – 13,073.1 at the moment – this is for a date approximately 6 months away. As you can see, the spread is 10.8 points, which compares to about 0.8 points for the daily bet with this spread betting provider. This large spread is a handicap which must be overcome before your bet gets into profit, but if you are taking a long-range view and deciding that the price will change significantly over a period of time, rather than taking a short term bet and looking for a sudden jump, then the future style bet will work better for you. Sometimes it is easier to bet on the general trend rather than anticipate minor fluctuations.
Say in this case you take the long view, and decide that the US economy will be better than the European one in the next few months. Factors that can figure into this include a view that the US has come further in tackling the recent recession, and will come out of the bad economy more quickly; and that the US dollar is the recognized international standard, which automatically provides the US with a sounder base from which to progress.
As you want to bet for the US dollar to go up, and this is the second currency named, you are actually betting that the euro will go down in the relationship, and therefore want to take a short or sell bet. You are selling the euro, which is the same thing as buying the dollar. You decide to stake £10 per point, and as you are placing a sell bet it goes on at 13,062.3.
If you are right, and the EUR/USD goes down, you might settle your bet in a few months when the quote is 12,835.2 – 12,846.0. The short bet will close out at the higher price of 12,846.0. The number of points you gained is 13,062.3 minus 12,846.0, which is 216.3 points. For your stake of £10 per point, you can easily calculate that this is worth £2163. As it was a futures style bet, there is no adjustment for interest for the time you held the bet open.
The danger with a futures style bet is that even if you are correct in the long run, there may be early fluctuations which go against you, and you might have to close your bet for a loss in case the price doesn’t recover. Say the quote goes to 13,091.6 – 13,102.4, and you have decided beforehand this is as far as you can risk the adverse move. You close your bet for a loss, and work out the damage.
Your bet was opened at 13,062.3, and closed at 13,102.4. This is a total loss of 40.1 points, which for your stake works out to £401.