A Guide to Forex Spread Betting

Spread betting is a type of derivatives product that enables you to trade on the movements in price of many different financial markets such as currencies, commodities, stocks and indices.  Forex spread betting is a branch of spread betting that specifically focuses on the currency market.  Spread bets can be used to speculate on the movements in price regardless of what direction the markets are moving in.  If you decide to go long (purchase) then you will generate a profit when the price increases.

If you decide to go short (sell) then you will generate a profit when the price decreases.  On the other hand, if you go long and the price of the underlying asset falls you will incur losses (and vice versa).  Spread bets are margined which means you only need to deposit a small portion of the total value of your trading position.  This also means that any potential losses and profits are higher than in traditional trading.  The margin that is required to open a spread bet is typically 1% to 10% the value of your position – this depends on the market.

Explanation of a Spread

Similar to other types of trading, two prices are quoted for spread bets – the buy price (the price you can purchase the underlying asset at if you believe the market will rise) and the sell price (the price you can sell the underlying asset at if you believe the market will fall).  The difference between the ‘sell’ and ‘buy price is referred to as the spread.  When tight spreads are quoted across the markets it allows you to maximize your potential profits no matter what direction the market is moving in.

Example of a Spread Bet

In this example, the spread bet is on the UK 100 index and let’s say that this index is trading at 5000/5001 (sell price and buy price).  You predict that the UK 100 index will increase over the next 2 weeks and so you purchase at the price of 5001.  You purchase this trade with a £10 per point stake size.  Let’s also assume that during the next 2 weeks the price of the UK 100 increases to 5050/5051.  Your prediction was correct and you decide to take your profits so you close the trade by selling the asset at the new price of 5050.

This means that your trade gained 49 points which is multiplied by £10 to give you a profit of £490.  Alternatively, let’s say the UK 100 dropped over the 2 week time frame to 4950/4951 and your spread is now in an open loss.  You decide to cut your losses and close your trade by selling the asset at the new price of 4950.  This means that your trade lost 51 points which is multiplied by £10 to net you a loss of £510.  The calculations in this example can also be used for forex spread betting.

Spread Bet Types

There are a number of different types of spread betting markets to fit your trading needs.  There are trades for day traders to long-term traders which allow you to maximize your profits while controlling your losses.  The following list outlines 4 major trading styles in the world of spread betting.

Day Spread Betting

• Trades last for minutes to hours
• Multiple positions trading throughout the day
• Generates profit from small price movements
• Trades based on market news and technical analysis
• Tighter spreads than other markets
• Lower margins than other markets
• Trades close at the end of the day
• No overnight risk
• No rollover charges
• Trades may be closed before the time of expiry

Short-Term Spread Betting

• Trades a few positions throughout the week
• Trades last from 1 day to 1 week
• Trades are based on market news and technical analysis
• Profits are generated from moves in the market of 1% to 5%
• Available on most financial markets
• Spreads are usually tight
• Overnight finance charge is usually small
• Dividends are shown as separate credits and/or debits
• Long-term settlement date
• Positions do no re-open and close every evening
• Trades can be closed before the time of expiry

Medium-Term Spread Betting

• Trades a few positions throughout the month
• Trades last from 2 weeks to 1 month
• Trades are based on fundamental analysis and technical analysis
• Profits are generated from moves in the market of 5% to 10%
• Available on most financial markets
• Spreads are usually wide
• Monthly expiry date is fixed
• Positions may be rolled over to the next month near the time of expiry
• Trades can be closed before the time of expiry

Long-Term Spread Betting

• Trades a few positions throughout the quarter
• Trades last from 1 quarter to 2 quarters
• Trades are based on fundamental analysis and technical analysis
• Profits are generated from moves in the market of 10% or more
• Available on most financial markets
• Widest spreads
• Quarterly expiry date is fixed
• No overnight finance charges
• Trades can be closed before the time of expiry
• Positions may be rolled over to the next quarter near the time of expiry

Forex Trading vs. Forex Spread Betting

The primary differences between traditional forex trading and forex spread betting are the trade sizes and leverages that are used.  Below is a more in-depth comparison chart of the differences between forex spread betting and forex trading.  In forex spread betting, the initial margin is calculated by multiplying the margin factor with your stake size.  Alternatively in forex trading, every trade is placed with a specific leverage ratio which is determined by you (i.e. 100:1).  Leverage plays an important role in traditional forex trading as it determines margin.  This is another significant difference between traditional forex trading and spread forex trading because in spread trading your margin is not based on a leverage ratio.

About the author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes informative essays for the globally renowned spread betting and CFD trading provider, InterTrader.com.