An Introduction to Spread Betting

Essentially, Forex spread betting involves a trader “betting” in which direction the price will move. The trader can assign any value he desires to a pip and has to bet whether the price will be higher than the price quoted by the forex broker or lower.

For example, if the EUR/USD is currently being offered at 1.3802 and the bid price is 1.3801, or the price you would sell at, you would have to bet whether price will move about the ask or below the bid. If you bet $2 per pip, for example, that the price will rise and the rate moves to 1.3817, then you make a profit of $30. However, if the price moves against you and drops to 1.3790, then you would incur a loss of $22.

While $2 per pip might sound like a small amount to risk, you need to remember that the Forex market is extremely volatile and can move hundreds of pips per day. If you get caught on the wrong side of a spread bet you stand to lose a significant portion of your capital. This is why you should always use a stop loss, which will protect you if the market moves quickly against you. Additionally, you won’t be stuck in front of your computer screen, watching what the market is doing every minute until you close your position.

Spread Betting: The Advantages

One advantage of spread betting is that it allows trading virtually any security, from commodities to stocks and currencies, from the same screen. While in Forex it may not be attractive due to high levels of leverage, when it comes to other financial assets it’s one of the best ways you can trade if you don’t have the capital to outright purchase the stock or commodity.

Another advantage to spread betting, especially when it pertains to other financial markets other than the Forex market, is that traders avoid the costs incurred by the heavy regulation brokers are subject to, ranging from commissions on a purchase as well as a sale, taxes and more.

Spread Betting Equals Speculation

If you are a long-term trader which practically equates to being an investor, you should understand the fact that spread betting is essentially day trading or speculation. In other words, when spread betting you should be focused on short-term gains. Of course, it offers retail traders a freedom to trade a wide range of financial assets and profit from a rising or a falling market.

Remember, though, that spread betting is considered to come with a high level of risk because the potential losses you incur are practically unlimited. For this reason, you should always use good judgment when spread betting and avoid relying on your uncle’s nephew’s boss’ tip that price will move in a certain direction.

Spread Betting is Not Gambling

While the name might say otherwise, spread betting is not gambling. You still need to analyze market conditions, the underlying asset as well as price charts and only then make an informed decision.

It’s true that there is a lot of money to be made but it can be lost just as quickly. This is why you should never treat it like a game. You need to be completely dedicated and willing to put in the time and effort to do your due diligence before you place a bet.

Spread betting is an excellent way for retail traders to trade on various financial markets, including the Forex market, for short-term profits. However, like any type of speculation, you need to remember that there is a high level of risk involved which is why you should always take steps to ensure you minimize your risk exposure as much as possible.

Related posts:

1. Novice Introduction To The Futures Trade
2. An Introduction to the Fascinating Forex World
3. Forex Speculation: High Risk for High Profits
4. Forex Market Trading: An Introduction to Charting