Updated: December 25, 2014
Go to a bank and you’ll notice that they would have rates for buying and selling US dollars.
For example, they’d be “buying USD” for PHP 42.00 and “selling USD” for PHP 42.50.
This means if you have USD 100 and you want to convert it to Philippine Pesos, then the bank will be “buying your US Dollars” for PHP 42.00 per dollar, effectively giving you PHP 4,200.
Now let’s say after exchanging your cash, you suddenly decided that you want your US Dollars back.
The bank will now be “selling you US dollars” – which means the PHP 42.50 rate will now be applied; and with your PHP 4,200 – you’ll receive only USD 98.82. Yes, you just lost USD 1.18.
Basically, that’s how the bank, and other forex institutions such as money changer businesses, make money – from the “spread”.
In simple terms, the “spread” in forex is the difference between the buying and the selling price. And people who trade forex are said to be just betting on the spread of a currency pair.
Below, is a guest post from a UK forex trader who shares with us a few tips on risk management in forex trading (aka spread betting).
If you’re into currency trading, then I’m sure you’ll find his article helpful.
Forex can be a daunting marketplace for the beginner, and many people are put off by the fact that they have to actually buy and sell foreign currency, which can be complicated and leaves them open to risk.
If you’re one of those people who isn’t too keen on the idea of actually trading currency, but is interested in making money through currency speculation, then there is another route to take.
This is financial spread betting. It works on exactly the same principles as spread betting in sports – you wager a certain amount of money, and win more depending on the degree to which your guess is correct.
In sports, this might be the number of goals scored in a football match, and in FX, it is the increase or decrease in the price of a currency pair.
You can find a great deal of beginner information on the internet which will explain exactly how spread betting works. It is a relatively low cost way of getting involved in the market, but still has potential to make a considerable amount of money – it all depends on how much you are in a position to put in.
There are many ways to improve your chances of making money when spread betting, and countless strategies, but these are the basic guidelines that you should follow in order to maximize success:
- Look for the lowest spreads: The spread is also the amount the price must change by before you can start making a profit, so the lower the better. Different brokers will offer different spreads on different currencies, so it’s always worth checking who is best when you look for your financial spreads.
- Know your market: As spread betting is speculative, just as the trading market, random bets would be a complete gamble. For this reason, you should always make sure that you know all of the news and can predict market movement. This includes using both technical and fundamental analysis.
- Only bet what you can afford: Most brokers will offer you tempting leverage options, which means that you deposit less than the position you hold. This can be great, but it does mean that you could lose more money than you initially deposited. Always be aware of this.
- Use your head: Don’t treat spread betting like you would gambling. Always have a reason to make a spread bet, which means make sure you see an opportunity, and don’t trade for the sake of it. Emotion has no place in the world of Forex, so do not let it affect you.
If you follow these simple rules, then I’m sure you’ll have a much easier time making money when spread betting. But always remember that you should make sure that you’re completely confident with how the markets work before diving in, and try a demo account first, if possible.
There is no reason you can’t make money in forex spread betting, so give yourself the very best chance to do so.
This article is written by Boris Smith.