Spread Betting: Trading Pound/USD
Did you know that you don’t have to find a Forex broker and invest a reasonable amount of money in order to profit from trading forex exchange like the Pound/USD? Using spread betting, you can trade not only shares and indices, but also forex pairs and currencies, and you are not limited to ‘lots’ of 100,000 currency units but can name your own price. One example is the GBP/USD cross-rate – the GBP/USD currency pair is also known as trading the “Cable” by analysts which is a reference to a transatlantic cable that was used to transmit currency prices in years gone by.
The key factor that impacts the value of a country’s currency is its interest rate. So in practice trading a currency is a function of predicting where interest rates are heading and to do this one would need to keep an eye on economic data such as inflation and unemployment. In practice if inflation is rising, the central bank is likely to hike interest rates and this will support the currency. On the other hand, if the problem is high unemployment, then the central bank is more likely to keep interest rates low (or even reduce them) which will have a depreciating effect on the currency.
For short and medium term trading, spread betting using a forex rolling daily spreadbet is a most economical way to profit. Rolling daily simply means that the contract does not expire at the end of the day, but is rolled over to the next trading day. As with all spreadbets, the initial cost of trading is included in the spread you pay when you take out the contract. To keep the position open overnight, the rolling daily incurs an interest charge each day you leave the position open.
GBP/USD Trading March 2013 Commentary
When you are spread betting on shares and roll a position over to the next day, interest is charged; likewise when you roll over a Forex spread bet, the amount of interest charged depends on the ‘Relevant Funding Rate’, which is derived from the interest rates for the different countries, and could even work out to a positive payment. Apart from having more choice in the amount you stake, this could be another advantage of using spread betting for your Forex trades.
In general the Pound/USD also tends to display an inverse (i.e. negative) correlation with the USD/CHF and a positive correlation to the EUR/USD cross-rate. This is because of the positive correlation between euro, Swiss franc and the British pound.
Naturally, one can expect the values of the Pound Sterling or USA dollar to be impacted by the interest rate differential between the Bank of England and the Federal Reserve. Let’s take an example. Let’s assume the latest announcement by the Bank of England of another round of Quantitative Easing to help the UK economy (which, however, is likely to pressure sterling). Following such an announcement, if you expected the additional Quantitative Easing to support indices while pressuring sterling lower, you could go long on the FTSE 100 while at the same time sell sterling against the US dollar (going short GBP/USD). If you were right in your prediction and the FTSE rose higher while sterling lost ground against the USA dollar you would net a profit. Of course if the markets moved against you (i.e. the FTSE retreated or sterling rose against the USA dollar), you would incur a loss.
Sterling/Dollar Spread Betting Example
The pound sterling (symbol: £; ISO code: GBP), commonly referred to as the pound, is the official currency of the United Kingdom. Let’s say the present Pound/USD spreadbet price is 1.5020/1.5023 (sell price/buy price). Note Pound/USD spread bet works on a per 0.0001. A typical minimum spreadbet of 50p and minimum margin of 80 times the stake would apply with most providers. A quote of 1.5020/1.5023 would mean that the pound was worth a fraction above one dollar and 50 cents. A minimum spreadbet of 50p a point would translate into an exposure of £7,511.50 [15023 x 0.50]
Going Long
You believe sterling is undervalued and think it will appreciate against the USA dollar and thereby decide to buy (go long) at 1.5023 using a £10 stake per point.
You were right: As you predicted, the UK Pound strengthens against the USA dollar, and when it reaches 1.5210 you decide to cash in your gains. The rolling daily spread is now being quoted 1.5210/1.5213 and you sell at 1.5210 using a £10 stake per point.
Result: You bought at 1.5023 and sold at 1.5210, a rise of 187 points (pips), which at £10 per points nets you a profit of £1,870 (1.5210 – 1.5023 x 10).
Alternative scenario: If however, sterling had gone down (sterling depreciates) against the USA dollar to 1.4838 and you decide to close your position, you would net a £1,850 loss (1.5023 – 1.4838 x 10).
Going Short
You expect sterling to weaken (sterling depreciates) against the US dollar and decide to sell (go short) 1.5020 using a £10 stake.
You were right: As you correctly anticipated, sterling moves down against the dollar, and when it reaches 1.4860 you decide to close your position and take your profits. The spread betting company’s rolling bet spread is now 1.4857/1.4860 and you buy back at 1.4860.
Result: You sold at 1.5020 and bought back at 1.4860, a fall of 160 points (pips), which at £10 per point results in a gain of £1,600 (1.5020 – 1.4860 x 10).
Alternative scenario: If however, sterling had risen (sterling appreciates) against the USA dollar to, say, 1.5172, and you decide to close the position you would net a £1,520 loss (1.5172 – 1.5020 x 10).
For the purpose of simplicity, financing charges have been excluded from this example.
The pound has weakened considerably since 2007, making UK exports more attractive to overseas markets. At the same time, costs in manufacturing powerhouses such as China have risen, making imports less attractive.
Forex Currencies: The GBP/USD
The British (U.K.) pound sterling (or pound) plays a pivotal role in the financial markets and as such traders commonly trade it in a pair against the U.S. dollar. The GBPUSD is quite a liquid but volatile currency pair to trade with daily moves exceeding 100 points being fairly normal. The pair also has a tendency to follow medum-term trends. If, for example, you are trading the Pound/USD, with the typical 100 to 1 leverage on your Forex account, you would need to put up $1,000 to buy one lot. Taking on a spread bet on the same currencies, you can trade anything from £1 per pip ($0.0001 change in value) on upwards. Your stake would depend on your broker, but would be a fraction of the Forex markets. You are not going to profit to such an extent from such a small bet, but it may be the difference that allows you to enter the market at all, or to place several trades.
The rolling daily cost will depend on your broker and the interest rates. It’s best to assume that there will be a charge, but it will still be minor compared with the money that you need for a conventional currency trade.
When you spread bet, you can take either the long or the short position equally easily, so all you need to do is figure out which currency is going to increase in value compared to the other. You should start this assessment by looking at which country has the higher interest rates. Given equal stability of the economies, the higher rate is likely to attract foreign investment and cause the currency to increase in value.
Another consideration is the market sentiment. How the market sees the currency pair may be very different from your own views. When sentiment reaches a peak it may be time for the current trend to change. It is also worth noting the trading range as each currency pair can trade differently especially during market overlaps. For instance the volatility of the GBP/USD increases sharply as the Asian trading session overlaps with the Frankfurt and London open. This time is particularly important as it can help reveal market momentum and changes in sentiment coming out of the close of the Asian session and the opening of the European markets and UK trading sessions.
Finally, you must look at the price charts, and see if the chart is supporting your view of the market, or opposed to it. It’s always best to find a trade that allows you to trade with the trend, as this gives the best chance of success.
Spread Betting: Trading GBP/USD
One of the most familiar currency pairings traded on the foreign exchange market is the pound sterling versus the US dollar (GBP/USD), which is also known as “cable”. This name dates back to the days of transatlantic telegraph communication with a cable laid on the Atlantic seabed. This predated radio communication, and was used to transact the currency exchange as far back as the 19th century.
Both of the currencies have a long history, and have great international standing. In the case of the pound sterling, this came from centuries of the British Empire spread around the world and London as the major financial market, and for the US dollar it comes from the massive size of the American economy, and the adoption of the US dollar as an international standard in the 70s, when the gold standard for currencies was abandoned.
So from a trading point of view, GBP/USD is one of the major currency pairings, is highly liquid meaning that there is a lot of trading in it, and is also volatile or risky. Despite its familiarity, it may not be the best of currencies for beginners, as the volatility can be punishing to someone who does not have the experience to deal with it.
When deciding how to trade, you will want to look at both fundamental and technical analysis factors. Firstly on the fundamentals, the general direction of each economy will have a bearing on the currency performance. There are many different gauges of the state of the economy, and the ones that seem to have the most influence on the value of the pound sterling and US dollar are the job market, as measured by employment figures, the rate of inflation, consumer confidence, the balance of trade, and the prevailing interest rates.
While many of those factors simply happen, the interest rates are subject to manipulation by the Bank of England and by the Federal Reserve Board. In fact, this is one of the few tools that government has to directly affect the economy. If interest rates are out of line between two countries, then in simple terms money will flow to the country that offers the greatest returns. With no change in interest rates, you could for instance buy US dollars with pounds if the American interest rate was higher, and after a year have a greater amount of money than if you had left it in England.
Of course, in practice such simple guaranteed financial schemes do not work, as the Bank of England would be inclined to increase its interest rate when money left UK, and the currency exchange rate would also be affected by supply and demand. The net result is a fluctuating balance between different currencies.
For the short term trader or spread better, technical analysis provides some insight into the market sentiment and can give pointers for daily moves. Many traders use systems derived from moving averages, and there are a number of technical indicators and oscillators that will reveal the prevailing mood.
Spread Betting on the GBP/USD
Spread betting on the GBP/USD makes more sense for some people than opening a Forex account, as you can name your own price and not be restricted to “lot” sizes. The spread betting account can be used for many other financial instruments, too. The current spread betting price for a daily rolling bet on “Cable”, as this currency pair is known, is 15,525.9 – 15,526.9. This is an excellent small spread or difference of only one point, which allows the bet to almost immediately go into profit if it goes the right way. As the pound sterling is the first mentioned currency, a “long” or “buy” bet on this pair means that you think the pound will strengthen against the dollar and the price go up.
If this is the case, you might want to place a buy bet for £5 per point. This is at the buying price of 15,526.9. Assuming it works out, you might see the spread bet quote go up to 15,714.6 – 15,715.6, and decided to close your trade and take your profit. To close a buy bet, you sell at the selling price of 15,714.6.
This is how you work out what you won: –
- your long bet was placed at 15,526.9
- and closed at 15,714.6.
- The number of points you gained is 15,714.6-15,526.9.
- This works out to 187.7 points.
- Your bet was £5 per point, so multiply this by 187.7.
- You have won a total of £938.50
Whenever you make a financial trade, you must consider that it could lose. Suppose the price went down to 15,493.2 – 15,494.2, and you decided that you should close the bet before you lost any more. You work out your losses is a similar way: –
- your long bet was placed at 15,526.9
- and closed at 15,493.2.
- The number of points you lost was 15,526.9 – 15493.2.
- This works out to 33.7 points.
- Your bet was £5 per point, so multiply this by 33.7.
- You have lost a total of £168.50.
As another example, suppose you thought that the US dollar was strong, and would go up against the pound. In this case, you would want to place a short or sell bet on this currency pair. At the current quote, this would go on at 15,525.9, and say you staked £2.40 per point.
You are looking for the quote to fall, so if it went down to 15,321.8 – 15,322.8 you might close your bet and count your winnings. Here’s what you gained: –
- The short bet was put on at 15,525.9
- The bet was closed at 15,322.8
- The difference is 203.1 points
- With a stake of £2.40 per point, this is worth £487.44
If this bet went the wrong way, you might close it quickly to minimize your losses at 15,563.4 – 15,564.4. Calculating the loss: –
- The short bet was put on at 15,525.9
- The bet was closed at 15,564.4
- The difference is 38.5 points
- With a stake of £2.40 per point, this cost you £92.40
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