Three tips for new forex spread betters

published 25 August 2011

As money flees to safe havens such as the Japanese yen and the Swiss franc, new spread betters may be tempted to turn to foreign exchange (or 'forex') markets. If so, here arethree things worth knowing about the market before you take the plunge.

Currencies trade in pairs

Every upbet on one currency is a down bet on another. In that sense, you are automatically doing what other spread betting markets would call a pairs trade (eg, long gold/short silver, or long FTSE/short Dow). So it's not enough to be bullish on, say, the yen you need to decide what you think the yen will strengthen against. It is entirely possible, for example, for it to move up against one currency, such as the euro, and down against another. Or, at the very least, for it to move at different speeds.

Currencies are their own boss

When gold prices fall, it usually suggests share prices will be rising. That's because when markets are confident, money piles into shares and out of gold as a safe haven, and vice versa when markets are fearful. Equally, bond and equity prices tend to move in opposite directions bonds are havens for the fearful, whereas equities are favoured by the bold.

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Currencies do not behave the same way as an asset class. Sure, when gold prices rise, so might the yen on the basis that both are a safe haven. But there is not a big enough correlation between the two for that to be taken as read. Exchange rates are barometers for entire economies and therefore subject to a huge range of factors (from interest rates, to their perceived safe haven qualities to unemployment and GDP stats - and, of course, political developments).The message is simple focus on one currency pair and do your homework.

Currencies can make or lose you money fast

The currency market is the most liquid in the world volumes here regularly exceed equity markets by factor often or more. That's good and bad. It means you can open and close positions with ease. However, it also means prices can be very sensitive to new news.That comes from the very small 'tick' or 'pip' sizes in this market. For example, if the GBP/USD rate is quoted at 1.6368 when you buy it and you bet at £10 per point, a move to just 1.6388 makes you 20 pips or £200 if you are betting at $0.0001 pips. So watch your bet sizes!

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.