Foreign Exchange Forex trading is simply the exchanging of one currency for another - Each Forex trade can theoretically be viewed as a 'spread ' trade where to buy one currency you must sell another. Convention dictates that currencies are measured in units per 1 USD. USD, therefore, is the default 'lead' currency. It is open 24 hours a day which a financial bookmaker may not be - with buyers and sellers operating by telephone worldwide. Settlement is in two day, or sometimes less.
The most popular trades are between the US dollar and either Sterling or the Euro. Your risk is that a currency bet could go the wrong way. To protect yourself, enter your trade with a target level and a stop loss.
You place a market order to buy 1 lot of , Euros at 1. At the same time you place a stop-loss order at 1. The price rises to 1. You have made a profit of pips.
On the subject of forex trading, spread betting firms' spreads are very similar to retail forex brokers. The costs are the same. The difference is whether you get taxed on it which can really make a substantial difference. Makes the decision a no-brainer for anyone other than a consistent loser not troubled by annual profits. With spread-betting, there are no "lots" as such.
You just decide how much you want to "bet". You can sell at 1. You have to "put up as margin" anything you want for your stop-loss plus some fixed margin amount maybe 20 pips extra, or whatever. I prefer spread betting to traditional foreign exchange dealing, but that's just me.
A lot of people lose money at spread-betting just as with any form of trading but perhaps all the more so because the potential to "play with small margin" makes it even more dangerous for people who don't know what they're doing! Few people care to admit to themselves that they don't know what they are doing.
However, it's easy enough to get the feel for it. All you need to do is try out one or two of the spread betting firms in "demo mode" [try opening a demo account at Ayondo to practice].
Just ask yourself this: If the foreign exchange brokers charge a 3 pip spread and a spread betting firm charges exactly the same, what is the benefit of using an FX broker? As I have pointed out in the past, if the forex spread being offered by Deal4Free is the same as that being offered by CMC Plc the same company , there is no incentive whatsoever to execute the trade through the latter. Personally, I have an account with fxcm. To me, the differences are i that the spreads are typically smaller with Capital Spreads, ii the customer service is typically better and iii the profits are completely tax-free from "betting" but not from "investment".
This last point is a peculiarity under UK tax law and probably not relevant to non-UK residents, though it's very relevant here, of course! My own view as a part-time forex trader is that spread-betting definitely has the edge. If you don't use spread-betting and choose forex trading at a traditional broker such as Oanda, FXCM or Refco, you then have a choice. You can either declare yourself as a "professional speculator" and pay income-tax on your profits, or not. But that depends on whether you have a job as well, of course.
The reality is that very few people do this. You get a certain amount a year as a tax-free allowance. Unlike income-tax, it's very much harder to claim things against CGT, but this is where a suitably experienced accountant will be able to advise you further.
And not only because of the tax position. Spread betting is simply perfect for swing trading. It is not however suitable for intraday trading, since the house controls the spreads, not the market participants The charts dominate currency trading. If you get involved, make sure you get to gripe with the principles of technical analysis. There are a quite a few people that make decent money spread betting and they are not as stupid as people think they are.
I say, keep it very, very simple, don't fill your head with pretence or snobbery and if you DON'T feel a bit of trepidation when you are about to trade. Stop right there and walk away. Spreadbetting is as profitable as any other method if it suits you. The size of the spreads very much depends on the company one chooses and they are not as wide as one is led to believe.
Those that argue otherwise have not checked these facts properly and might be surprised at what they find eg. There is always the house edge but if you can find a way of neutralising the house edge, spread betting can offer a convenient, tax efficient means of trading, particularly from limited capital at the start of a longer term plan. Now that competition among spreadbetting firms is increasing some of them have realised that making and keeping it trader-friendly is the way forward and its improving all the time.
An advantage of forex brokers is the platform flexibility. A key advantage with dealing with a forex broker is the functionality of being able to place contingent orders which we are led to believe will soon be available on some spread betting firms. Dedicated FX services offer you all the tools in one place, essential in such a volatile market; all the news and research you need is focused on the FX market so it may pay to open accounts with forex brokers just to have access to their advanced trading applications.
Spread betting also offers the spread better increased leverage. Leverage is a great thing if you know what you are doing - but it is perilous if you don't have a clue. There is one hidden charge most FX brokerage firm fail and avoid to mention. How many forex traders get victimized by interest charges by holding Forex trades more than one day? The majority of forex spreadbetting nowadays takes place on "rolling" products, which have no expiry and no daily charge for keeping the position open.
When you look at the business models of these sorts of companies, they are essentially the same when it comes to forex. Another hot argument is whether spread betting companies do or don't lay off their bets. To be brutally honest though, I really don't give a tinkers cuss whether they do or don't.
I'm only interested in my PnL, not theirs! If you want to trade directly into the spot market, you need a lot of capital don't ask how much, I just know I am nowhere near! Other than futures, retail traders really only have two choices.
FX broker or spread betting company. Some of the old-fashioned traders have been slow to learn some of the advantages but are making the move as and when they realise that the spread on the FTSE is 2 points rather than 6 as they've wrongly imagined for so long.
Understandably, this sometimes makes them very blinkered and prejudiced. There is a hot debate going on whether gains from spread betting will or will not remain tax-free if they are one's main source of income. In case anyone's lost among all the words and argument here, let's just state a couple of things openly, simply and clearly here: When you trade forex with an ecn broker you regularly experience slippage. This is because they can only pass on trades in blocks of 1 full lot.
Now, when you trade with a "stp" straight through processing broker who claim to pass your trade on direct to the market you rarely experience slippage unless there is a gap due to a news item, etc. The interesting thing is that when you start to make money with a stp broker you suddenly find that you are experiencing slippage.
This is obviously because once you are flagged as a profitable trader they start to pass your trades on to the market. The same problem occurs as with an ecn broker and they can't pass your trade on immediately all the time as they have to trade in blocks of 1 full lot. This has happened too many times to be a coincidence and with too many brokers and what it obviously means is that they are NOT passing your trades on "stp" at all unless they consider you a threat to their profits.
In this way they are actually behaving exactly as a "market maker" or spread betting company. How does this relate to spread betting and this article? The big difference that I can see is that the spread betting companies are all pretty much upfront about what's going on. You are betting directly against them but if they don't like the look of you or your bet then they can simply hedge off your trades with the wider market and still make good money on the extra spread you are paying.
What matters to the successful trader is the overall cost of doing business. The overall cost of doing business is by no means limited to the bid-offer spread of the product dealt in! There are many other factors to take into account.
It's naive to pretend otherwise. If you want to use any of it on your website contact us via email traderATfinancial-spread-betting. Become a fan on Facebook Follow us on Twitter. Go back to Financial Spread Betting - Home. A key advantage with dealing with a forex broker is the functionality of being able to place contingent orders which we are led to believe will soon be available on some spread betting firms Dedicated FX services offer you all the tools in one place, essential in such a volatile market; all the news and research you need is focused on the FX market so it may pay to open accounts with forex brokers just to have access to their advanced trading applications.More...