How to spread bet on forex markets
A look at the benefits of spread setting - A tax-free way to speculate on the forex markets.
Spread betting is, as the name suggests, a form of betting where you essentially wager against a broker based on your prediction of price movements in the forex markets. It is tax and commission-free.
While UK tax law considers financial spread betting as gambling, the industry is regulated by the Financial Conduct Authority as a trading activity. Many forex traders view themselves as professional traders rather than gamblers, despite the similarity to betting on sports or games of chance.
Spread Betting in Forex Explained
Spread betting allows forex traders to speculate on the direction of currency pairs. Traders can go long (buy) or go short (sell) on currency pairs.
When spread betting forex, two prices are quoted for each currency pair – the bid price (to buy) and the ask price (to sell). The difference between them is the spread, a fee taken by the broker when a position is opened. You decide your stake per pip or point movement. Profits increase with each point the market moves in your favour, calculated as the difference between the opening and closing price multiplied by the stake per point. Losses can also be magnified with leverage so risk management is important.
For example, in a 1:2 risk-to-reward trade, a trader speculates that EUR/USD will rise by 200 points and stakes £1 per point. If the price hits the desired target, the trader earns a profit of £200. On the flip side, if the price goes against the trader they will lose £100.
Popular Forex Spread Betting Brokers
I recommend checking out CMC Markets, IG, City Index, Pepperstone, FXCM and FXPro. These brokers all offer spread betting accounts as well as great education and tools to help traders understand forex trading strategies.
When selecting a broker, it is important to understand the fees involved. Aim for brokers that offer the lowest spread fees available on the currency pairs you wish to trade. For example, CMC Markets offers a minimum spread of 0.5 points on the EUR/USD pair, while IG has a typical spread of 0.6 points on EUR/USD. Comparing the typical spreads across brokers for your preferred currency pairs can help you select the one that provides the tightest spreads overall. The lower the spread fee per trade, the less impact it will have on your profit potential. Checking reviews and comparing fees are worthwhile steps when choosing the best value broker for your trading style.
It is also important to understand that the prices quoted by a spread betting firm are not necessarily the same as the prices in the underlying forex market. Spread betting companies generate their own prices, known as setting the market. This means the quoted prices on a currency pair can deviate from the actual market prices, even if the overall direction is typically correlated. So traders should be aware that spread betting forex prices reflect the broker's market, not necessarily the forex spot market. This gives brokers some leeway on the exact pricing. However, reputable brokers will strive to provide competitive spreads that closely track the broader forex market prices even if not always identical. When opening positions, traders should compare broker spread betting prices to spot market prices to identify any discrepancies.
Step-By-Step Guide To Trading Forex Spreads
Follow these steps to start spread betting forex:
- Open a Spread Betting Account - Provide personal details to open an account with your selected broker. Read and agree to all terms.
- Deposit Funds - £100-£500 is a good starting point if you are just starting out but do bear in mind that the minimum stake per trade is usually set to £0.50 per point. For every 50-point move that is the equivalent of £25.
- Research the Forex Market - Study fundamentals, and keep up with news. Read expert forecasts and analyses that complement your own trading strategy. Having and sticking to a trading plan/strategy is key to success.
- Find Currency Pairs - Use your brokerage account to locate popular currency pairs such as EUR/USD, GBP/USD and USD/JPY, remember the more popular the currency pair the tighter the spreads will be.
- Place Order - When ready, place a buy or sell order. Specify your points target, risk amount, and order type (e.g. limit entry, stop entry, market entry).
- Manage Trades - Monitor open trades. Consider setting price alerts. Aim to close short-term trades daily to avoid overnight fees.
Forex Spread Betting Frequently Asked Questions
Many new traders have questions about how spread betting works for currencies. Here are answers to some of the most common questions.
Is spread betting a good way to trade forex?
Spread betting offers certain advantages for forex traders, such as tax-free profits, leverage, and the flexibility to take both long and short positions. These features contribute to its popularity as a means of speculating on currency movements. However, while the potential for profit is increased, losses can also be magnified. Therefore, whether spread betting is a good way to trade forex depends on an individual's risk tolerance, trading strategy, and understanding of the associated risks and rewards.
What currency pairs can I spread bet?
Most forex brokers offer spread betting on all major, currency pairs including EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, USD/CAD USD/CHF as minor crosses and exotic pairs.
Is spread betting forex risky?
Spread betting, like all leveraged products, has risks, and it's notably higher compared to trading spot forex because stakes are larger, and lot sizing isn't applicable.
Is spread betting good for long-term investing?
Spread betting is better suited for short-term traders rather than long-term investors because of the cumulative costs involved in keeping positions open over time. This includes daily financing fees charged by the broker (known as rollover costs) as well as account maintenance fees.
