Trading in Spot Currencies

Remember, these are short-term, same-day currency spreadbets although you can opt to have a spot contract rolled from one day to the next for a small financing fee. You are spread betting on whether currencies will rise or fall in the short-term.

Let’s take the GBPUSD, also known as the Cable. It is the first currency in the foreign exchange pair – referred to as the base currency that counts. So if you believed that sterling is likely to rise against the dollar you would buy GBPUSD. If you were of the opinion that the pound was going to weaken you would sell it short or buy USDGBP.

What matters is to choose the right forex pair. For instance, had you bought 2 per point of the sterling/dollar (GBPUSD) in May this year at $1.4250 and sold this trade recently at $1.6000, you would have gained a nice profit of 3,500. Of course, had the trade gone against you, you would have incurred a loss and this is what makes Forex trading both lucrative – and risky at the same time.

The dealing spreads are small because the potential movements are quite small. You do not expect currencies to move dramatically within the course of just one day (or a few days) – although this can happen.

The rules are exactly the same as for forward currency trading.

Example: Buying the USA Dollar/Canadian Dollar

On the morning of 10th January, you decide that the USA $ will strenghten against the Canadian $. You check for a spot price USD/CAD and are quoted 9847.5/9850.5 ($1 = Can 0.98475 – 0.9850). You decide that the Canadian $ will weaken (or the dollar will strenghten; same thing). You buy the US$ at 9850.5 for $10 point. By 6 pm the market has moved quite a long way in your favour, and you decide to close your bet. You SELL the USD/CAD at $10 per point and are quoted 9987.5/9990.5. You deal at 9987.5.

Your profit is

Opening Position: 9850.5
Closing Position: 9987.5

Difference: 137 points @ $10/point = $1370 profit.

Example: Selling the British pound/USA Dollar

On the morning of 15th February, you decide that the £ will weaken against the $ (or the $ will strenghten against the £ – same thing). So you decide to SELL the £/$. You call for a price and are quoted 16809/16833. You sell at £20/point trading at 16809.

By lunch-time, the market has moved significantly against you, and so you decide to close your bet and cut your losses.

You telephone, and are quoted 16876/16900. You BUY at $10 per point (at 16900) and close your bet.

Your losses are:

Opening position: 16809
Closing position: 16900

Difference: 91 points at £10/point = £910.00 loss.

But why would you want to deal in currencies? Most do so in an attempt to make gains from fluctuations in currencies i.e. to speculate – in which case the scope is to profit from price fluctuations between two currencies; an activity that is normally substantially leveraged so as to magnify possible gains (but this would also amplify the risk). However, others look at currency trading as a way to diversify their market exposure. This is because currencies have a low correlation to many other asset classes and sometimes this correlation is inverse meaning currencies tend to move in the oppositie direction to stocks and bonds. Others use currencies as a hedging mechanism; for instance if are based in the UK but have an international stock portfolio in euros you are exposed to the euro day-to-day fluctuations, and you could neutralise the euro exchange risk by taking a short position on the euro.