Forex (Foreign Exchange) is one of the most popular trading categories for the online trader. It has recently been reported that up to $4 trillion dollars is traded on global Forex markets daily (this excludes the trading of Forex based derivatives). This makes it one of the most active markets in the world and is particularly attractive for traders as Forex markets are open 24/7 with the exceptions of weekends. Many people are interested in trading Forex but are unsure as what actually drives the fluctuations found in the Forex markets, today we are going to examine some of the factors that drive movements in the international foreign exchange markets.
Speculation
By far the biggest factor in the daily movements in the Forex market is pure speculation unrelated to underlying economic conditions. Some have stated that around 70% of all Foreign exchange trading is speculative, with major international hedge funds rise to prominence in the 90’s playing a significant role in the rise of currency speculation. While it is hard to gauge which way speculation will take a market, it is possible to use speculation to your favor when trading Forex by surfing the underlying speculative trends.
Political Conditions
Political conditions and even the political party in power can have an effect on movements in the Forex markets. Political stability is crucial, no right minded investor wants to hold the currency of a nation suffering from significant political instability due to the inherent risk that political instability holds. Real life examples where major currencies have suffered significant negative movements in currency valuations are plentiful. In recent history unstable governments in Thailand have had a significant downward effect on Thai currency prices. 2012 might see political instability in Russia also lead to a drop in the strength of Ruble, though such a movement will also be linked to capital flight out of Russia.
Inflation
A currency of a nation which is either struggling with inflation or seeing significant increases in inflation will typically see a decrease in the strength of the currency. This is due to the relative buying power of the currency decreasing. Though sometimes inflationary pressure will lead to the expectation that the central bank will take action and raise interest rates to combat inflation, this expectation can in fact lead to a rise in the price of the currency.
Economic Growth
One of the more obvious factors that effects the movement of currency prices. Generally a healthy economic outlook means that there will be strong demand for the currency and this will have an effect on strengthening the currency. Economic growth also attracts investment from outside sources meaning there may be a strong flow of capital arriving into the country.
Government Fiscal & Monetary Policy
Governments use of fiscal and monetary policy can effect the price of currency. Typical a rise in interest will see hot money enter the country and strengthen the currency, while a lowering of interest rates will lead to money leaving the country in order to look for opportunities to earn greater interest. Monetary policy also plays a role as this can effect the money supply and can have complicated effects on the value of the currency. For example working out what the effect recent bouts of Quantitative easing will have on the currency prices has been difficult. In one way QE raises the chance seeing higher rates of inflation (a downward pressure on currency) but at the same time should stimulate positive growth in the short term. It can also be noted that Government efforts in controlling currency values have been terribly ineffective in recent times, with the belief governments could really control currency prices being crushed by Black Wednesday in 1992.
Government Deficits and Trade Balances
Unsurprisingly large Government deficits, negative and worsening trade balances have a negative effect on currency prices. These indicators often reflect trouble for the economy as it shows imbalance and also shows a lack of international competitiveness. Of course positive trade balances and government balances have the opposite effect leading to strengthening of the currency on international markets.
Psychological Factors
Market psychological factors can also play an important role. Many of those trading on the Forex markets will be either knowingly or unknowingly effected by these psychological factors. These factors include flight to quality during international scares, long term trends and market rumors.
Book Review: Spread Betting the Forex Markets: An expert guide to spread betting the foreign exchange markets
For the first time here at Made to Trade, we are featuring a review of a book. From time to time we will either review a product or book here which is related to trading and spread betting. The world of trading is a washed with resources that promise you insight into how to make money from financial markets. Here we hope to cut the truth from the bullshit and help you pick the resources that will be beneficial to your trading efforts.
Today the featured book Spread Betting the Forex Markets: An expert guide to spread betting the foreign exchange markets by David Jones. The book is written by David Jones who is in fact not a trader but rather a technical analyst who rose to prominence in the world of Forex. While a few may be put off by the fact the book is not written by someone who traded but rather an analyst, I feel this represents no problem. In fact being analyst probably gives you a broader base and better written skills which are key in writing a book. Also not to forget that analysts are the ones providing traders with information in order to make informed decisions.
David Jones should be commended for his efforts in writing the book. The book represents a very good introduction into both Spread Betting and its use in trading Forex. The book is clearly and concisely written so that anyone could pick it up and garner significant knowledge of the subject matter. It is in this area where the book really excels and makes it an excellent buy for those looking to learn more about the subject matter.
The book includes great information on how intraday positions are rolled over and how the costs associated with this can affect the profitability of your position. Also Davids advise to use simple momentum indicators to indicate where a Forex position is headed, is invaluable.
Though I said the fact that David Jones is analyst rather than trader didn’t take away from the book. The one point where this fact is evident and that is in the sections which deal with trading strategies. It’s not that these sections are bad but rather that they only offer up basic strategies and don’t offer some more of the complex strategies. Though this book seems to be pitched at quite an introductory level so this doesn’t present too much of a problem.
I would highly advise the purchase of this book to people who wish to garner more information on Spread betting, in particular to how you can use it make money from the Forex markets. I would overall give the book a high 4 out of 5.
The Beginners Guide to Spreadbetting
Recently I have been writing a number introductory articles to Spread betting. I intend to use this post as a place to compile all the articles in one place in a logical order. Allowing readers to easily find the articles and post they want to access. Hope you find the articles useful and informative.
Part 1: Pros & Cons of Spread Betting
A quick piece on the relative Pros & Con’s of Spread betting, plus information about how Spread betting came into existence.
CFD Trading represents one of the biggest other forms of online trading and here we compare the differences between the two products.
Part 4: Spread Betting guide to Margins and Margin Calls
A guide to the Margins and Notional Trading Requirement, explaining how you can get such high levels of leverage with spread bets.
A guide to the Margins and Notional Trading Requirement, explaining how you can get such high levels of leverage with spread bets.
Part 5: Is Spread Betting for me
A quick look at what kind of people will be suited towards taking up Spread betting, also raising some of the risks involved. Spread betting may not be for everyone.
A quick look at what kind of people will be suited towards taking up Spread betting, also raising some of the risks involved. Spread betting may not be for everyone.
Part 6: Explaining the Spread: The Spread vs The Underlying Price
Explains why there is a difference between The Spread and the underlying price of the financial and why shopping around for best price is often very beneficial.
Explains why there is a difference between The Spread and the underlying price of the financial and why shopping around for best price is often very beneficial.
Part 7: A Basic Guide to Spread betting order terminology
A list of some the key order terms commonly used in Spread betting.
A list of some the key order terms commonly used in Spread betting.
Part 8: Factors to consider when opening a spread betting account
A run through of the considerations one should make when choosing where to open their first account(s).
A run through of the considerations one should make when choosing where to open their first account(s).
Part 9: Risk Management for Beginners: The use of Stop Loss explained
A post on why risk management is so important to Spread bettors and how the use of Stop Losses can help maximize returns and minimize losses.
The guide is now complete look out for the follow up called Made To Trades Guide to Beginner Strategy and Analysis for Spread Betting. This guide can be download as a PDF for free at Megaupload
A post on why risk management is so important to Spread bettors and how the use of Stop Losses can help maximize returns and minimize losses.
The guide is now complete look out for the follow up called Made To Trades Guide to Beginner Strategy and Analysis for Spread Betting. This guide can be download as a PDF for free at Megaupload
Spread Betting Guide to Margins and Margin Calls
The nature of spread betting means that you are not required to cover the full cost of each spread bet up front but instead your required just to have the necessary amount of funds in your account to cover any potential – this commonly known as the Notional Trading Requirement (NTR). It is in this way that your able to achieve significant leveraging through the use of spread bets.
The Notional Trading requirement is calculated in two different ways:
- As 10% of the value of the potential loss that could be made on a trade.
- As a multiple of a pre-determined value known as the bet size factor.
In this example the required margin for a long bet on Big Bank PLC is 10. The order amount stands at 1 and the price at 100, so the notional trading requirement is 10 as the maximum potential loss that an individual could make on this trade would be 100.
While your bet is open the bet will enter into either what is known as an open profit or loss position. This is the calculated profit or loss made from a particular bet depending on the movements in the market. While your bet remains in an open profit position, you have no need to worry about margin calls. But this is not the case when you are in an open loss position, the total amount of funds that have to be available from your account increase. If you do not have the required amount of funds in your account what will result is known as a margin call. The spread betting company will contact you.
In order to keep the trade open with the hope that your position will return to a point where you are back in open profit, extra funds will need to be transferred into the account. How the company will treat you and how quickly decisions need to be made on your bet will often depend on how well the company knows you and your history with them. In an ideal world one whats to avoid being forced to close a position by the company.
Warning: Spread betting risks substantial financial loss, all transactions are at your own risk. Only speculate on financial spread bets within the limits you can afford. Spread betting may not be a suitable investment for all. Make sure that you understand the risks involved and seek independent advice to whether spread betting is suitable for you.
Part of The Beginners Guide To Spread Betting
Part of The Beginners Guide To Spread Betting
The Similarities & Differences between CFD’s & Spread Betting
One common confusion out there in the trading public at large is the difference between CFD’s & Spread Betting. The difference can be hard to see, but there is a very important similarity between the two products in the fact they are both leveraged investment products.
The Similarities
- Both products are derivative based products. This means you don’t own the underlying share or commodity but are trading on movements in prices within that particularly asset class.
- Both CFD trading and Spread Betting involve margin trading. You only put up a initial deposit to cover your position.
- You have the option to both short and long asset classes. Allowing you to potentially profit during both bull and bear markets.
- (UK) As you do not own the instrument you do not have to pay Stamp Duty.
- Many of the markets on offer through both CFD trading and Spread Betting are the same.
Differences
- Prices offered by spread betting companies are synthetic, i.e the spread is determined by the spread betting company. While CFD prices often reflect the underlying the value of the traded commodity.
- One important thing to remember is that a CFD company makes its money of the commission and interest charged. If you lose money on the trade you undertook beyond these costs your CFD trader doesn’t make any extra money. This is different from Spread Betting companies.
- CFD trades are undertaken in a the currency of the underlying asset, so there is a very slight risk from currency price swings.
- Costs of financing a CFD trade are not quoted in the overall price as within in Spread betting. But there is a separate financing cost.
- A positive for CFD’s is that a CFD owner takes part in the corporate actions of the company, when holding a share CFD position.
- CFD profits are subject to capital gains tax where as Spread betting profits are not as they are deemed to be gambling. Though Spread betting losses can’t be used to offset tax in the same way CFD losses can.
- CFD’s can typically be held for longer periods than Spread bets can, which means in certain situations it may be more beneficial to use CFDs. Most spread bet traders aim to get in and out of a position within a day.
These are the main differences between CFD trading and Spread betting. In future posts we will examine how and when one should use CFD trading and Spread betting.
The Pro’s & Con’s of Spread Betting
Today we are going to ask the question what is the driving force behind the recent rise in spread betting. Say you have £10,000 pounds of savings you want to invest, you will be faced by a multitude of investment opportunities. You might want to put the money into a basic savings product such as cash ISA, or manage a small stock portfolio on your own. You may invest in a fund managed by a fund manager or purchase units in a tracking fund which will track the performance of the market.
But there is one thing that all these options cannot provide you! That is the possible potential returns that a successful spread better can make. Though the risk factor is much greater it can be possible to make consistent returns far greater than any other investment opportunity.
A type of derivative, spread betting presents the investor with the opportunity to bet on the movements of shares, index’s, currency’s, commodity’s and bonds. It allows you to make returns on the movement of these financial products without physically owning the share or the bond. Spread betting has allowed increased access to the financial markets, the kind which was once limited to the financial big players.
Created in the 70’s by Investment banker Stuart Wheeler, spread betting really only began to catch on in the late 90’s. The continued rise of the internet in Noughties has only fueled the spread betting boom. With spread betting being one of the fastest growing derivative markets.
There are three main reasons for these huge growth of spread betting including the rise of high speed internet, increased market volatility and the potential returns a prudent spread better could in theory make. Spread betting has evolved in order to take in a growing and more diverse market.
Here we are going evaluate what the Pro’s & Con’s of spread betting are. This might help you get a better picture of whether spread betting is suitable for your financial needs. My views are unbiased.
Pro’s
- There are considerable advantages to spread betting. The main ones are featured here.
- Simple spread betting is easier to understand than many other financial instruments, including competitors such as CFD.
- Small capital requirements accounts can be opened for less than £100, and trades can be made from accounts with balances as low as £28.
- Small upfront costs you only pay a small amount of the total costs, usually only 10% upfront, this is known as margin trading.
- Make money from both bull and bear markets, giving you the possibility to make money from both rising and falling markets.
- Spread bets are tax free, providing you have another source of income.
- One account and less paperwork, which makes managing a spread betting account an easier prospect than other types, of financial products.
- Extended trading hours, the huge range off markets and options means you can trade 24/7 365 Days a year.
- The possibility of unlimited profits and limited losses.
Cons
- Costs when you close the trade, all spread bets have expiry dates unlike traditional share trades, with conventional share trading you only confirm your loss once the shares have been sold.
- No dividends or interest, you don’t get returns from investments in terms of dividends and interest but you can get the benefit of movements from such events and announcements.
- Losses cannot be offset against capital gains, as can be done with traditional forms of share investments.
- Due to how spread betting works you can lose more than your initial deposits, which is something which isn’t a worry with traditional financial products.
- Spread betting is not geared towards long term investments, due to the costs involved in keeping a trade open over multiple.
Warning: Spread betting risk substantial financial loss, all transactions are at your own risk. Only speculate on financial spread bets within the limits you can afford. Spread betting may not be a suitable investment for all. Make sure that you understand the risks involved and seek independent advice to whether spread betting is suitable for you.
Part of The Beginners Guide To Spread Betting
Part of The Beginners Guide To Spread Betting
Spread Betting The Very Basics
Today we are going to teach you about the very basics of spread betting using share prices as an example. We are going to break this down into several steps for you.
Step 1: Getting a quote. You ask for a bid-offer quote from a spread betting company. This can be done in several ways, online, telephone, etc.
Step 2: If you hold the belief that the value of that commodity (in this example Shares) is going to rise above the offer price which has been offered by the Spread betting company. In this situation you would buy.
If you hold the opposite belief to the one above, i.e namely that the commodity (in this example Shares) is going to fall below the bid price offered by the spread betting company, in this situation you would sell
Step 3: Pick your stake size, this is the amount you will risk per point movement of the commodity price. For example this can often be as low as 10p. If you place a 10p stake on a Buy – if the share price rises 10 points above the offer price offered by the spread betting company you would have made a £1 profit.
Step 4: Inform the spread betting company of the funds you wish to risk and place an reasonable stop-loss position in order to prevent large losses.
Example picture:
Warning: Spread betting risk substantial financial loss, all transactions are at your own risk. Only speculate on financial spread bets within the limits you can afford. Spread betting may not be a suitable investment for all. Make sure that you understand the risks involved and seek independent advice to whether spread betting is suitable for you.
Part of The Beginners Guide To Spread Betting