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.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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.
Latest Videos FromMoneyWeek
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.
