What Is Forex Spread Betting and Who Offers Lowest Spreads?

Spread betting is commonly used as a means of trading forex. The currency markets are the largest globally by trade volumes, with trillions exchanged on a daily basis as investors, governments and companies look to make the most of their money. Used for hedging, investment and sheer price speculation, the forex markets are fast paced and highly volatile at the best of times, and when spread betting is thrown in the mix, the model becomes even more lively. For short-term traders looking to make a quick profit, this is good news – fast moving markets mean more action for traders, both positive and negative.

Forex spread bet trading is highly leveraged as a rule, although the costs of financing this leverage are deductible from trading profits. In that sense, financial spread betting provides a degree of detachment from the forex transaction, using forex pairings as an index for quoting spreads rather than trading in the currency directly. This mitigates the costs of financing leverage, because leverage in spread betting is inherent in the DNA of the transaction – one point movements equates to one multiple of your stake, and this proportion of leverage remains unchanged. With only the stake amount variable, spread betting is arguably a much less intimidating marketplace for traders to engage with the currency markets, and allows speculation on currency prices without the hassle and pressures of funding leverage.

Spread betting on forex is designed for the short-term, and provides easier access to the forex and other major markets through one simple platform. The elegance and simplicity of the spread betting transaction should not be underestimated – in refining the trading process and delivering easily calculable returns and risks, traders can more readily turn their attention to the business at hand – identifying profit opportunities as they arise.

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How To Spread Bet on FX Markets

Forex pairs tend to fluctuate on the basis of domestic and international economic considerations. Always quoted in pairs, currencies will rise or fall against their counterparts depending on the economic decisions of the relevant authorities, and indeed the international approval of the home economy in the form of supply and demand for that particular currency. Consider the example of the UK. If the UK raises interest rates, this will generally translate into a higher return for savers in UK bank accounts. For investors managing substantial portfolios, including large institutional investors like hedge funds and pension funds, this might present a more attractive or more stable return for their clients, prompting them to buy pound sterling, in the form of a UK bank deposit. If the currency rate strengthens even more, selling Sterling will deliver a capital gain, in addition to the ongoing yield delivered by the savings rate of interest. And as more investors buy Sterling, demand will increase and push its price in comparison to other major global currencies skyward.

This leads to a couple of pretty significant conclusions. Forex markets, like any other, are driven by supply and demand, and the factors which prompt supply and demand considerations are wholly economic. If a government prints more money, known as quantitative easing, the value of the currency will fall because the money supply has been increased. If the UK looks like a safe economic prospect, investors will deposit there for the stability and security of returns that can be provided. As a trader, it’s up to you to identify the economic triggers on a particular day that could influence other investors to bid up or sell down a particular forex pair, through a combination of technical price analysis and an interpretation of current economic and political affairs.

Forex Spread Betting Strategies

Trading forex through your spread betting broker can be an effective way to benefit from spread betting tax advantages while also accessing the same currency markets with their attractive volatility and resultant profit potential.  When trading anything, be it forex, shares or pork bellies, it’s essential that you have a strategy in place that takes account of both the instrument through which you’re trading, and the market for the asset you are trading.  Forex spread betting is no different, and there are a range of different forex spread betting strategies that can be implemented to improve your chances of profiting from the markets.

Short Term Strategies

Short term strategies are commonly implemented when spread betting on forex, and indeed when trading forex through a spread betting platform.  Because of the ability to make quick returns in a fast moving and volatile market, short-term strategies are often seen as a good way of minimising the risks of wayward trades while also allowing suitable earnings to accrue over the course of the trading day.

Short term strategies, like scalping and spread betting day trading in the UK are designed as a means of reducing the risks associated with an individual transaction.  If a position is open for an hour or two, it arguably has less of a chance to go horribly wrong than if it were open for six months or a year.  These strategies turn their focus to making small profits whenever possible, with a ‘little and often’ approach to building a profitable trading portfolio.

Of course, it would be too easy if short-term strategies were a risk free, downside-free way to make money spread trading on the markets.  The shorter term the strategy, the more work you’re likely to have to input as a trader in terms of researching and monitoring positions.

You will also be required to foot a higher cost burden than long term traders, because of the sheer volume of bets you are placing.  More trades equals more commission for the broker, and these costs can quickly mount up over time.  At the same time, you’re also limiting the extent of your upside by arbitrarily trading over a short period of time, which can cause frustration and lost earnings in equal measure.

Long Term Strategies

Long term strategies are also applied to the field of forex spread betting, although less so when trading forex markets directly because of the costs associated with financing positions. With financial spread betting, it is possible for positions to roll over night without attracting financing costs, making it more suitable for longer term trading in the forex markets.

Long term strategies, like swing trading are focused on building larger profits through fewer transactions, and build in sufficient time for trades to move heavily in a favourable direction.  It is also a cheaper strategy in terms of trading costs, and one that requires less research work on an ongoing basis.

Unfortunately, it is more difficult to spot an opportunity for significant long-term earnings in the currency markets than it is to identify earnings potential over the course of one day, and the potential for significant losses over a number of months is huge.

Spread betting strategies, while varied and numerous, each have different benefits to contribute, and depending on your trading style you might prefer to opt for either type of strategy.  Whichever type of strategy you find yourself pursuing, make sure you have a full understanding of the individual risks it poses as a more important element than profit potential, to allow you to contain negative trading positions and build up a profitable investment pot.