What is Forex?
The financial market in the world is open around the clock. It has no central exchange. It is also the most competitively priced. Yet only a minority of private investors trade it, despite the fact that in some countries it can be accessed tax free by opening a special financial spread betting account. This market is the foreign exchange market, also known as forex or FX.
Most people tend to exchange currencies when they plan to go on holiday or visit a foreign country. But currency trading also represents a great alternative market to share trading. This is because currencies are traded in pairs. By using a currency spread bet also known as contract for difference CFD, you are backing one currency against the other. Nobody talks about the forex market being up or down, because whenever one currency is losing', another is winning.
Dual Impact
You will usually see a currency trade quoted by your spread betting provider as a pair of three-letter codes. Every currency traded in the market has a three letter code. For example, sterling is usually quoted as GBP, while the US dollar appears as USD. If you saw GBP/USD on your spread betting screen, the price next to it would be the number of US dollars that could be bought with one pound. If you then bought GBP/USD, you would be expecting to profit from a rise in the pound. If you sold it, you would be backing the dollar to strengthen against the pound (the number would go down as fewer dollars would be needed to buy a pound).
Spread betting and CFD trading also let you profit from changes in currency prices by using margin. Your spread betting provider or CFD broker is lending you the bulk of the value of your trade by only requiring you to deposit a portion of it, your margin. This is particularly useful for currency trading, because many currencies only change incrementally against each other on a day-to-day basis.
As with other products made available by spread betting providers, currencies have spreads (the difference between the buy and sell price also known as bid and ask price) and varying margin rates. The narrower spreads tend to be with the more liquid currencies, those that are bought and sold in big volumes globally, also known as the currency majors. These include the US dollar, the world's de facto reserve currency, as well as the euro, the Japanese yen, and the British pound.
Popular Spread Betting Currencies
Amongst the other popular currencies are the Canadian dollar and the Australian dollar, which are partly driven by the prices of the natural resources provided by both countries. When these are in demand, their associated currencies tend to go up as other countries are busy buying all that copper and oil. Similarly, they will tend to go down when commodities prices decline.
Beyond the eurozone, some other European currencies can see a lot of trading activity, like the Norwegian krona (another currency affected by the oil price, as Norway is a big oil and gas exporter) and the Swiss franc. The Swiss franc, usually seen as CHF on the trading screen, is often used as a safe haven' currency: traders will buy it against another currency during times of market turbulence, when investors are becoming less comfortable with risk. This is because Switzerland as a country is seen as politically stable and fiscally prudent. In Sri Lanka, there are a very few companies providing such spread betting accounts. If you open an account with them, you are able to trade on forex; but beware of the risk aspects a bit as well.
Corporate Balance Sheets Vs. Country’s Economy
When you do spread betting on share prices, you are focusing on a company's balance sheet, its results and the quality of its management. However, when you do spread betting on currencies, you are focusing on countries' economies, including how much money governments are borrowing and spending, and what their interest rates are and will look like. This is why many traders pay very close attention to statements made by countries’ central banks. In most major economies with freely tradable currencies, it is the central bank that sets interest rates. These can have a big influence over currency prices.
But apart from interest rates and borrowing, other factors can play a big part in the health of an economy. When governments announce unemployment and inflation figures, currencies can move suddenly. One of the more interesting currency trades over the last years has been the euro. While the European Central Bank has kept euro interest rates steady, the near-bankruptcy of the Greek government, and the fears surrounding the economic health of a number of other eurozone economies, have led to heavy selling of the euro.
At the same time, efforts by other eurozone countries to build a rescue package have prompted buying of the euro. This has made the euro an interesting currency for traders as it has moved up and down more frequently than it has historically tended to do.
