Forex Explained

Foreign exchange betting works in pairs. In spread betting, you are given the choice of currency pairs such as the GBP/USD pair – each bet requires the sale of one currency to purchase the corresponding currency. Forex spread betting is made up of major pairs (GBP/USD, EUR/USD …), minor pairs (CAD/JPY, GBP/CAD …) as well as pairs for a number of weaker currencies. Each pair is a ratio of one currency to the other, i.e. for GBP/USD the price might be 1.5971 meaning that £1 will buy $1.5971.

Forex is now the largest and most liquid financial market in the world and attracts traders that attempt to predict currency movements; its huge appeal is largely due to the small minimum bets (starting from 50p) but also because of the rapid movements in price known as ‘ticks’. Each tick (also known as a pip) equates to the smallest possible change in value of a currency pair i.e. in the GBP/USD pair a movement from 0.7624 to 0.7625.

Spread Betting Forex

Spread betting forex works in a very similar way to traditional spread betting. If you think that the first named currency in the pair is going to strengthen then you ‘buy’; alternatively, if you think the first named currency in the pair is going to weaken then you ‘sell’. The difference in the buy and sell prices is known as the spread.

Forex is known for its small spreads and a typical spread would range from anywhere between <1 to 3 points but rarely any higher. If you are facing higher spreads then you should probably trade forex elsewhere, we recommend IG Index.

A ‘point’ in forex depends on the currency pair. Usually a point is classed as a 0.0001 movement in price; so if you were buying at £1 per point, a positive movement of 0.0004 would result in a £4 gain. Other currency pairs may class one point as 0.01 but your spread betting provider will make this clear.

Forex Example

In this example we’re going to look at the GBP/USD major currency pair.

On the afternoon of October 25th 2012, the price of GBP/USD pair stands at 1.6190:1.6191 and you believe that the pound sterling will fall in value relative to the US dollar.

(Prices may sometimes be listed without the decimal point, i.e. 16190:16191).

You then sell the pair at 1.6190 for £10 per point.

30 minutes pass and your prediction pays off, with the price of the GBP falling against the dollar to 1.6183:1.6184 – you decide to close the trade, taking the ‘buy’ price of 1.6184 for a difference of 0.0006 and a gain of £60.

Remember that you can lose your money just as fast as you can win; always take precautions and read our guide on stop losses before betting