Why Now Is A Good Time To Trade Currencies With A Financial Spread Betting

By Author: Ben Finance
Total Articles: 3
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Currency markets are getting jittery – there is no doubt about that. There are a number of factors combining at the moment which make the foreign exchange or forex markets more interesting if you are the owner of a financial spread betting or CFD (contracts for difference) trading account.

Many widely-traded currencies are currently involved in what some analysts describe as “a race to the bottom” – the governments and central banks responsible for them are printing money (called ‘quantitative easing’ by economists) making their currencies cheaper than other leading currencies. This will help them to export goods more cheaply, and might even help to create jobs.

For a long time now, China has been the workshop of the world, and Chinese factories and exporters have been busy filling the shelves of shops in Europe and North America. However, in the wake of financial crisis in 2008, developed countries have suddenly found themselves in need of jobs and exports. With interests rates as low as they can go, central banks have also started printing money.

The most popular currencies for traders are ...
... traditionally the US dollar, the euro, the Japanese yen, and the British pound. The major currency to sell over the spring and summer months has been the euro, as the European Central Bank and eurozone politicians have struggled to contain the fall-out from the
Greek debt crisis.

The trick with currency trading is picking the currency you want to ‘buy’ against the currency you want to sell. In the case of the euro, many traders opted to buy US dollars and sell euro. With a spread betting or CFD trading account, this would involve a currency ‘pair’ like EUR/USD. This would show you how many US dollars it takes to buy a euro. If you wanted to ‘sell’ the euro, you would choose to make a sell order on this currency pair, as you would expect the number of dollars it takes to buy a euro to go down
as the euro weakens.

You don’t need to see a USD/EUR currency pair: if you want to back the euro against the dollar, you buy EUR/USD. If you want to support the dollar instead, you would sell it. Of course, now the euro has strengthened against the dollar again, but all governments in the developed world are becoming concerned about domestic unemployment, trade balances, and a lack of
proper economic growth. While the euro has been recovering over the last couple of months, the dollar has been ailing, sinking in value against other major currencies.

Another popular trade has been selling the dollar against the Japanese yen. The appreciating yen has got the Bank of Japan nervous, however, and on 15 September the bank sold two trillion yen in an effort to make its currency cheaper. The yen had already risen to its highest level against the dollar since 1995, showing what a good trade it was for spread betters.

The move by a central bank to try to devalue its currency has caused a sharp intake of breath on trading desks around the world. Why? Because this intervention by a central bank is unpredictable. Usually banks restrict themselves to carefully scheduled announcements about interest rates and borrowing, but to catch the market out, the buying and selling of large amounts of currency by a major player like a central bank is usually sudden and often unanticipated. With all eyes now on efforts by many other
governments to keep their currencies down, there is an atmosphere of mistrust emerging amongst bankers and politicians. Will there be any other sudden moves of this kind, traders are wondering?

From the perspective of financial spread betting, this means currencies could be subject to sharper changes than usual, with the prospect of bigger profits and losses. It means owners of spread betting and CFD accounts will need to watch their stop losses – the automatic sell orders used to close a trade
if a price moves suddenly while you are away from your desk (for casual traders, this means most of the time, making a stop loss a vital tool for managing risk). If a price moves suddenly against you overnight, the stop loss can minimise your loss, but at the same time, you may need to give a trade some room to breathe if that market is subject to large price swings.

CFDs and spread bets are ideal for trading foreign exchange markets. In the UK, financial spread betting is tax free, but in addition, both spread bets and CFDs offer the investor the use of margin, which is particularly important when you trade currencies. Because currencies usually fluctuate by only a fraction in an average trading day, you need to be using large amounts of capital to take full advantage of those changes. Margin trading means you can control large trades in the market by only committing a fraction of that trade (your ‘margin’). Large FX markets, like the US dollar, euro, or yen will usually only require low margin levels to trade, often as low as 1%. This means you can start FX trading while risking small amounts of money until you become more confident.