Three things to remember before spread betting the euro

Two markets are getting all the attention right now. There's the bond markets, with everyone worrying about Italy defaulting. And there's the currency markets, as traders speculate on whether the euro can survive. If you've got a view on the outcome, how can you trade it?

For spread betters, the foreign exchange (forex) market is the bigger and easier to play of the two. At the moment the euro is a tempting target for a bet. So here are three things to remember before you dive in.

1. Keep to the left

All currencies are quoted in pairs. So for example, there is a EUR/USD pair for anyone who wants to bet on the euro against the US dollar. The thing to remember is you bet on the currency on the left of the quote in this case, the euro. So if you think the euro will weaken against the dollar (so there will soon be fewer US dollars exchanged for each euro) you sell this pair. Equally, someone betting on a stronger euro would buy it.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

2. Don't get ticked off

The next thing to remember is that minimum movements in the forex market for the purpose of calculating profits and losses ('pips' or 'ticks') are very small.

For example, say you are offered a EUR/USD rate of 1.3531/1.3534. First off, if you are selling the euro against the dollar you do so at the left hand 'bid' rate of 1.3531 (the way to remember this is to think that your broker wants to give you the worst deal in the underlying currency here, the US dollar. One euro sold to your broker is worth less to you, in dollars, using the left hand rate).

And next, bear in mind that every $0.0001 move in the rate is worth whatever you decided to bet per pip or tick. In short then, forex movements can quickly trigger quite big profits or losses, and may move more rapidly than you're used to if you've previously stuck to equity markets.

3. Get stopped out

At the moment, currencies are moving even more quickly than usual, as traders speculate abut the future of the euro and try to assess the impact of the latest crisis on other economies. So to avoid being wiped out in one trade, set stop losses (at a price slightly above your opening price if you are selling and vice versa if you are buying). Ideally you want a 'guaranteed' stop so that you know the rate at which you can exit a trade.