Forex spread betting enables speculation on currency pair movements without direct foreign exchange transactions. This approach lets traders bet on potential rises or falls in value, offering a chance for profit based on market trends.
How To Spread Bet On Forex Markets?
Spread betting on the forex markets is straightforward and available to all brokers, with a wide choice of currency pairs to bet on. Below, I’ve outlined the five steps you need to take to place your first spread bet on a forex market.
1. Choose The Currency Pair
The first step is to choose the currency pair you want to spread bet on first, most brokers offer 40 to 100 pairs to choose from. If you are a beginner, choosing one of the major forex pairs like EUR/USD or USD/JPY would be ideal as they have lower spreads and less volatile movements. Alternatively, if you prefer to take on more risk, you can bet on minor and exotic pairs with wider spreads but larger market movements.
2. Determine If You Want To Bet On Forwards, Options, Or Spot Prices
A spot price in forex means the current market price and that you wish to enter the market immediately; this is the most common choice when spread betting. If you have a longer view of the movement of the markets, then you should use a forex forward that allows you to have lower nightly rollover fees but wider spreads.
Some brokers like IG Group and Spreadex also allow you to use Forex options to spread bet with. An option gives you the right, but not the obligation, to buy or sell the forex pair at a specific price. Options are a good choice as they can generate larger profits when the asset is volatile while limiting your risk to the option contract’s purchase price.
3. Place Your Forex Spread Bet
With the right currency pair and product chosen, you can place your first forex spread bet. Once you open up your spread betting platform, select if you want to go long (buy) or short (sell) in the market, and then enter your bet size. The deal ticket will allow you to enter your stop loss and take profit orders before executing your bet.
When you are happy with the bet size and direction of the market, you can place your bet by clicking the place order button.
4. Monitor Your Position
After you’ve entered your forex spread bet, it is a good idea to continuously monitor your position. The platform will show your running profit and loss, so if you haven’t yet set your stop loss, it’s a good idea to monitor this so you don’t risk too much capital.
5. Close Your Position
When the market has reached your desired target, and you want to close the position for a profit, go to your trading platform and click the “close” button. You will instantly exit the bet, and the profit generated will be added to your spread betting account. If you closed in a losing position, then the loss will be deducted from your spread betting account.
What Are The Advantages Of Forex Spread Betting?
Spread betting forex has many advantages that are exclusive to UK spread bettors. The main benefit of note is that taxes are exempt on winnings. Below, I’ll break down the advantages so you can consider if forex spread betting suits you:
1. Forex Spread Betting Is Tax-Free
If you spread bet on the forex markets, the profits you generate are exempt from capital gains tax, which can save you up to 20% extra profit. This exemption is because the HMRC (that collects the taxes in the UK) classes spread betting as a gambling product and is exempt from capital gains tax.
2. Spread Bet On Forex Markets In GBP
When you trade forex (either spot or through CFDs), your base currency will be converted into the forex pair you buy. For example, if your base currency is in GBP and you buy EUR/USD, your trade gets converted into euros, and you will be charged a currency conversion fee. Spread betting lets you bet in GBP on all international markets, meaning you will profit (and lose) all in GBP and save on conversion fees.
3. Commission-Free Trading On Forex
Forex trading is known to have low trading costs due to having highly liquid markets, but some brokers require a commission when you trade the currency markets. All spread betting firms offer spread-only accounts with no commissions, providing a simple pricing structure and no direct charges to your spread betting account.
What Are The Risks Of Forex Spread Betting?
Like all methods of growing your capital, there are spread betting risks you should be aware of. Spread betting has built-in leverage with its bet sizes, magnifying your losses (and profits) when the markets move against you. The smallest movements, like 20 pips, can take you out with leverage, while if you held the whole position with no leverage, you wouldn’t even notice the move.
An example is if you bet using leverage of 1:30 on a EUR/USD spread bet for £1 per point, then you would need a margin of ~£333 to open your bet. With this margin, you would control a position size of £10,000, meaning if the market moves 1%, you would make £100 profit.
If you deposited £333 as margin (your money), this 1% increase is actually a ~30% increase on your account. So if you lose 1% on the £10,000 position, you would be down ~30 on your margin. You can easily see how leverage accelerates your losses and profits from smaller market movements.
What Is The Difference Between Forex and Spread Betting?
There are many differences between forex and spread betting that you should consider; these are:
1. Forex Trading Involves Currency Pairs
When you spread bet forex you are buying one currency and selling the other at the same time, which is why you see them quoted in pairs (EUR/USD). So if you buy the market, you buy the EUR and sell the USD – and if you want to sell the market, you buy the USD and sell the EUR.
2. Spread Betting Involves Leverage
Leverage is built-in to spread betting and allows you to control larger bet sizes with smaller capital, and because you use spread betting, you do not own the asset. Using leverage can accelerate your wins and your losses, so you should consider using risk management to help limit your losses against sudden price movements.
3. Forex Spread Bets Allow Position Size Control
You can enter the amount you wish to risk per point when spread betting forex, giving you a simple and easier way of understanding your risk every time the market moves. Unlike forex CFDs, where you enter lots sizes to trade, you’ll have to determine how much each pip is worth and convert it into GBP to know your risk on a forex trade.
4. Spread Betting Is Tax-Free
One of the main differences is that spread betting is free from paying capital gains and stamp duty tax, which reduces your overall trading costs. While trading forex CFDs, you are liable to capital gains tax but do not pay stamp duty.
5. Commission-Free Trading With Spread Betting
Spread betting on the forex markets means you only have to pay the spread to enter the markets (which are tight) with no commissions, meaning all costs are paid at the execution of the bet. While using CFDs, some brokers charge commissions along with the spreads, which are charged at the entry and exit of the trade.
What Is Forex Spread Betting vs CFDs?
Contract for Difference (CFDs) and spread betting are popular ways to trade the markets as a retail trader. CFDs offer the same trading opportunities as spread betting when speculating on price movements.
As the name suggests, a CFD means you are buying into a contract and agreeing to pay the difference between the open price and the closing price of an underlying instrument. CFDs are a type of leveraged derivative product used worldwide (except in the US) to trade all types of financial markets. This type of trading is especially popular with retail traders since it can be done at home via an online broker and an internet connection.
Spread betting is pretty much the same as the CFD derivative product when it allows you to profit from the underlying asset. However, the key differences are that spread betting is limited to UK citizens, and you do not pay capital gains tax on your profits. While you will not need to pay a capital gains tax, unlike with CFDs, you cannot offset losses for tax returns.
The below table is a summary of the differences between spread betting vs CFD trading.
| Features | CFDs | Spread Betting |
|---|---|---|
| Ownership of the asset | No | No |
| Fees to trade | Commission and spreads | Spread only |
| Tax implications | Capital gains tax | Tax free |
| Availability | Worldwide | United Kingdom |
What Is The Best Forex Spread Betting Platform?
As the forex markets are available on all brokers, you can use any spread betting platform to trade them. A trading platform is a personal preference as it is the control centre of your entire betting operation. Still, I’ve rounded up the best forex spread betting platforms below for you to consider:
1. MetaTrader 4
MetaTrader 4 is a popular spread betting platform available on all MetaTrader 4 spread betting brokers. It has an excellent interface that looks like a professional terminal and lots of space for charting, but it remains easy to navigate. MT4’s charting comes with a solid selection of technical analysis and drawing tools to help you analyse the markets and trade off the charts with the one-click trading tool, ideal if you are a scalper.
One of the key features MetaTrader 4 offers is its customisation, allowing you to create your own technical indicators and automated trading robots (Expert Advisors). It’s one of the few platforms that allows automated trading, so if you want to automate your forex bets, MetaTrader 4 is a top choice.
2. TradingView
TradingView is the new spread betting platform on the block and comes with the most advanced charting tools available and comes with over 100+ technical analysis tools built-in. If you like to use technical analysis and annotate your charts, then TradingView is a top choice.
It’s consistently updated with new features like automated Fibonacci levels and candlestick pattern scanners, and you can develop your own technical indicators. I like TradingView as the charts sync across every platform, allowing you to have your analysis with you from desktop to mobile, while other platforms do not offer this.
3. MetaTrader 5
MetaTrader 5 is the updated version of MT4 with performance upgrades that improve the speed of automated trading and introduce new features not found on the MT4. For instance, you can now use the Direct Market Access tool that displays market orders for a financial instrument at different prices so you can understand where liquidity is.
It also has more technical indicators and allows you to trade multiple assets (MT4 won’t let you bet on stocks). So, if you want the benefits of MT4 but need access to a range of markets, then the MetaTrader 5 is a solid pick.
FAQs
Why Spread Bet?
Most traders choose to spread bet, in the hopes of making profits by successfully speculating markets such as financial and sports markets. Spread betting appeals to many due to the lower spreads, tax exemption, 24/5 trading, and the wide range of derivatives markets available to bet on.
What Is Forex Vs Forwards Vs Options?
As a trader, you are never short on ways to speculate on the markets, especially with derivative trading.
Spot forex is the underlying asset to both forwards and forex options. Depending on how the underlying market is doing, it will affect forward and forex option contracts.
Forwards are contracts to exchange currencies at an agreed rate and date in the future and work similarly to spot forex trading. Although you can speculate with forwards, they are geared toward businesses that need to hedge against currency risk.
Conversely, options trading provides traders with greater flexibility and manage risk compared with spot forex and forwards, but they are more complicated to learn. Options are contracts that give you the right (but not the obligation) to buy or sell an asset at a predetermined price on or before a specific date.
Forwards, by contrast, means you are obligated to buy or sell the agreed rate in the contract at a set date in future. Options allow you the choice to buy or sell at the agreed rate in future. Because of this extra flexibility, you pay an extra premium compared to Futures.
| Feature | Spot Forex | Forwards | Options |
|---|---|---|---|
| Ownership Of The Asset | Yes | Contract To Buy/Sell In Future | Right To Buy/Sell In Future (No Obligation) |
| Settlement Date | Immediate (on the spot) | On a future date | On a future date |
| Price | Current market price | Forward price in the future | Stike price |
| Risk | Market volatility | Market volatility | Limited to premium |
| Liquidity | High | Low | High |
What Is Spread Betting?
Spread betting is a derivative product you can use to capitalise on the price movements of a financial market without owning the underlying asset. You can use spread betting on a variety of markets (stocks, indices, forex, and commodities) and bet on the rise (long) or fall (short) of the market price.
These features make spread betting an attractive financial derivative because you can take advantage of bullish and bearish markets, giving plenty of opportunities to bet during the day.
How Does Spread Betting Work?
Spread betting works by staking how much you want to risk per point the market moves in your favour. For every point the price moves, you’ll earn (or lose) your stake size multiplied by the number of points moved. So if the market moves by 50 points and your stake size is £10, you will make £500 profit.
When spread betting, you can go long and short in the markets, which allows you to capture opportunities unavailable to traditional trading methods. If you think the markets will rise, you will go long (buy) the markets, and if you think they will fall, you will go short (sell).
How Does Margin Work With Spread Betting?
Margin allows traders to open a larger position, increasing their exposure to currency movements. This is critical as most currency pairs have small movements historically, making it difficult to make substantial profits or losses without leverage. We discuss the concept in greater detail on the margin spread bet page.
In spread betting, margin works by enabling you to open a much larger position than the capital you deposit. Essentially, your trading provider lends you the rest of the funds in a process known as leverage.
What Are Some Tips For Forex Spread Betting?
Forex spread betting offers many opportunities to bet every day because it’s one of the most liquid assets in the world. To take advantage of this, here are five tips on forex spread betting:
1. Start With A Demo Account
Using a demo account is free, and you can use virtual funds instead of risking your own capital, so it’s an ideal set-up if you are a beginner. You can open a spread betting demo account with any broker to test their platform and broker set-up, but more importantly, you can practise trading forex.
2. Develop Your Spread Betting Strategy
Don’t try to bet on a live account until you have a consistently profitable spread betting strategy you have tested on a demo account with reliable results. It’s essential to have a structure and understanding of the markets to help you find and have confidence in the trading ideas you find.
3. Use Stop Loss Orders
Adding a stop loss to your bets will help limit your losses and safeguard against sudden movements against your position. If you trade without one, and a price spike hits your bet, you could lose much more capital than you intended, so it’s best to be safe than sorry.
4. Start Small
When you start a live account, you are both excited to earn money and anxious about losing it. So, I recommend starting with the minimum stake size when transitioning from a demo account to a live one. This small start allows you to have skin in the game but lowers your risk of the amount you may lose. Over time, as you build experience and confidence, you can scale your bet sizes as you please.
5. Focus On A Few Currency Pairs To Begin With
There are over 70+ currency pairs to spread bet on, giving you lots of opportunities to profit from, however, it is best to choose 2-3 currency pairs to focus on and work with them. It will allow you to become familiar with the personalities, patterns, and average trading ranges of the pairs. A few solid pairs to begin with are EUR/USD, GBP/USD, and USD/JPY, as these have high liquidity and tight spreads.
Key Takeaways
- Financial spread betting is (mostly) only legal in the UK
- Spread betting on forex markets allows a trader to predict specific currency movements without owning the foreign exchange
- The direction, size and spread are the key components of a financial spread bet
- Leverage is used in spread betting to increase exposure. It helps make modest movements of financial markets more profitable (or costly)
- Spread betting is tax-free in the UK
- You should only choose an FCA-regulated broker if you are in the UK
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