The GBP/USD Forex pair represents the strength and weakness of arguably the two major currencies in the world’s financial landscape. You might try spread betting on Asia’s and in particular China’s economic situation, but experience provides a fuller historic context to GBP/USD. While sterling was the “go to” currency for a long time, the US dollar has been the international standard to which all other currencies defer for decades.
When you are assessing the relative pricing of two currencies, you must first understand the background to how they got to where they are. In the case of “Cable”, as the foreign exchange traders refer to this pairing, there have been many variations over the decades. At one stage in the 60’s the fixed exchange rate was £1 to $2.80, and various climactic conditions since then resulted in a brush with “parity”, where one pound sterling would equal one US dollar. The current exchange rate, about £1: $1.60, has been mostly stable for years, apart from a period during the global economic crisis when there were once again more than two US dollars to the pound.
Here’s a recent daily price chart which shows a slight uptrend now turning into a downtrend. It is important to realize that these trends may be caused by either or both currencies. For instance, if the American economy is seen as growing stronger, the index will rise against sterling even if the UK is no weaker. Currency transactions always involve currency pairs, and one or other of the countries may have a greater impact on price movements.
You can assess the likelihood of a trend by closely following political news, particularly productivity and unemployment rates. However you should not place a spread bet on the basis of such general information without consulting technical analysis to allow you to determine the mood of the market, and therefore where the prices are likely to be going in the short term.
Forex GBP/USD Rolling Daily
Trading on the Forex can be much more challenging than trading stocks. You have two competing forces, the economies of two countries, jostling the price level, as Forex is simply a comparison between two currencies. In the case of the pound sterling versus the US dollar, where the current spread betting quotation is sell at 16,080.1, buy at 16,081.1, you may feel that the pound is due to strengthen against the dollar, and decide to stake £1.50 per point or pip.
As GBP is the first mentioned or base currency, this is a long or buy bet and will be placed at 16,080.1. For the sake of this example, assume that the price goes up to 16,353.5 – 16,354.5, at which price you decide to cash in your bet and collect your winnings. The bet will close at 16,353.5, which means you have gained 16,353.5 minus 16,080.1, or 273.4 points. With a stake of £1.50 per point, your winnings amount to £410.10.
Quite often you will find that the bet does not go your way, and that you have to accept your loss and close the bet, and wait for your next trading opportunity. Perhaps after you placed this long bet, the price fell and you closed the bet when the spread betting quote was 15,878.2 – 15,879.2. That means that your bet would have closed at 15,878.2, the selling price. 16,080.1 less 15,878.2 is 201.9 points. If you multiply this by your stake, you will find that you have lost £302.85.
Another way that is popular with many traders to close out a losing bet is to place a stop loss order at the time of taking out the trade. This saves having to watch the markets so closely. With a stoploss order, you might find that you had been taken out of the losing bet a little earlier and saved some money – perhaps the bet would close when the price was 15,936.7 – 15,937.7. With a starting price of 16,080.1 and a closing price of 15,936.7, you would have lost 143.4 points, equal to the financial loss of £215.10 this time.
GBP/USD Forex Spread Betting: Futures
When your trading strategy is aimed at medium-term gains, it can be worth using a futures based spread bet, rather than placing a bet which is rolled over each day. The current quotation for the GBP/USD far quarter futures based bet is 16,070.0 – 16,081.5. You can see that the “point” of the quotation is the same as the Forex “pip”. If you think that the dollar will be weakening, you can take a short position on the dollar (which is the same as a long position on the pound sterling) by buying a bet for £1 per point on this pairing.
By way of illustration, assume that the price goes up over the next weeks or months until it reaches a point when you decide to cash it in, say when the quote is 16,415.2 – 16,424.2. As this is a long bet, it closes on the lower or selling price, in this case 16,415.2. The starting price was 16,081.5, which means you have gained 333.7 points or pips. At £1 per point, this is a profit of £333.70.
The alternative case is that the price goes down, until it reaches a level when you decide that you need to close the bet and accept your loss. Perhaps you would close it when you see that the price has fallen to 15,826.3 – 15,836.8. Working out how much you have lost, 16,081.5 minus 15,826.3 is 255.2 points, for a loss of £255.20.
Many spread betters choose to use a stop loss order, which covers closing the bet if it is losing, whether or not they are watching the markets. With one of these, you might find that your spread betting provider closed the bet for you at 15,881.9 – 15,892.2. Your losses in this case would be 16,081.5 less 15,881.9, which is 199.6 points. For your chosen size of stake, this amounts to £199.60.