Three tips for forex spread betters

With the major currencies bouncing around all over the place, many spread betters will be tempted to try their hand in the forex markets. But before you dive in, make sure you know the pitfalls.

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It's all happening in the forex markets. The euro is under pressure as sovereign debt woes continue to stalk Ireland, Portugal and Spain, and the Germans get ever more nervous about the cost of supporting other eurozone members.

Meanwhile, in the US, the latest round of quantitative easing (QE2) is yet more bad news for the US dollar (more dollars = a lower price in the foreign exchange markets). So with major currencies bouncing around, plenty of spread betters will be tempted to try their hand in the forex markets.

However, before diving in, be aware of a few pitfalls, especially if you are used to trading in other markets such as equity indices (eg FTSE 100). Here are three of the main things to look out for.

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Watch your speed

You can lose money fast in any spread bet but forex takes the biscuit. Currencies can be highly volatile, with profits swinging to losses in seconds. So keep your initial stake low and make full use of your broker's trading simulation before going live.

Know your currency pair

In equity markets you can bet on a variety of shares using, for example, a FTSE 100 index bet. That's exposure to all sorts of companies from banks to telecoms to 'big pharma'. That lowers the volatility. But in the forex markets you are betting on specific pairs of currencies, and you are up against the pros at the big banks in what is the biggest market by daily turnover in the world.

So you must know what you're doing. Spend time getting familiar with one pair and don't spread yourself too thin. Otherwise you might as well pop down to the bookies and punt on the horses!

Get comfortable with stop losses

Setting a stop-loss - paying a broker to limit the damage from a forex trade - will widen the bid-to-offer spread and eat into your profits. But a novice wading into the shark-infested waters of the forex markets without one in place could get eaten alive.

A 'guaranteed stop' gets you out of a losing trade at a guaranteed rate. Paying for one may wipe out profits on your first few trades, but that's better than taking a battering.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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