Spread Betting Guide

Spread Betting With Currencies

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The largest market in the world at present is the forex market, with approximately $4 trillion traded daily. Because of this high liquidity, forex markets are very good to spread bet as they have very tight spreads and tend to trend very well. Markets that trend well and have tight spreads are obviously excellent candidates for spread betting.

Cash Markets vs Futures Markets

In spread betting currencies there are effectively two different types of forex to trade. One is the cash markets and the other is the futures markets. Cash forex markets are known on most spread betting platforms as either rolling daily, daily funded bets (DFB) or spot. There are all effectively the same thing and means that delivery is on the spot, not carried forward to a future date, as are futures contracts. Futures contracts, also known as forwards settle at a date in the future and there are four different contracts per year, March, June, September and December.

The spreads on cash forex are very tight, with major currencies often coming in around 1 pip of spread. In addition, cash forex markets attract an overnight funding charge. This is minimal but can add up over time.

Futures, or forward currencies have a wider spread, generally around 5-6 pips per side for a total of around 10-12 pips. Futures don’t attract an overnight funding charge as it is already factored in to the price of the market, so effectively the only cost of the futures or forward currency bet is the spread.

The spread and funding charges actually make a difference and it is an important distinction for spread bettors to make as they will always have the choice of trading cash or forward bets. As a general rule, positions that will be held for anything from a day to around two weeks generally work out cheaper on the spot markets, whereas positions held for periods of over two weeks, such as we do at LS Trader, are generally better trading forward contracts. There are other factors, but these are useful guidelines to go by.

Which One to Choose?

Therefore, in summary, short term traders, or day traders, will generally be better spread betting the cash markets and taking advantage of the tight spreads offered. Longer term traders, such as trend followers or position traders that will hold a trade for a few weeks, will generally do better spread betting the forward bets.

In addition to the difference between cash forex and futures, there are of course numerous different currency markets and currency pairs. At present, the world’s reserve currency is the U.S. dollar, so futures contracts are generally one currency against the U.S. dollar. In futures contracts the main futures contracts are the Australian dollar, Canadian dollar, Euro, British Pound, Japanese Yen, Swiss Franc. In order to spread bet these futures contracts, one would select the forward bets in the currency section on the spread betting platform being used.

The Major World Cash Markets

In the cash markets, the major markets are the same but these are known as currency pairs rather than contracts and include:

AUD/USD –  Australian dollar/U.S. dollar
GBP/USD –  British Pound/U.S. dollar
EUR/USD –  Euro/U.S. dollar
USD/CAD –  U.S. dollar/Canadian dollar
USD/JPY -  U.S. dollar/ Japanese yen
USD/CHF    -  U.S. dollar/Swiss franc

There are of course many more pairs, but the above are known as the majors. In order to trade the cash markets, one would select either rolling daily, daily funded bets, or spot forex on their spread betting accounts.

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