The Forex market is the world’s most-heavily traded market. It dwarfs equities trading by a long margin. Get the scoop on optimal spreadbetting strategies for currency trading

What Makes Forex Markets Tick and How to Profit from Them?

Get the Facts before You Engage in Forex Spread Betting

Spread betting on forex markets requires an innate understanding of what moves currencies relative to one another. It comes as no surprise that the forex market is the world’s biggest market by a long margin. More importantly, it is highly volatile owing to the fact that it is dependent on a multitude of interconnected factors such as economic announcements on employment, PMI data, inflation rates, interest rates, technical data and fundamental data. But does this mean that one has to be a market expert in order to engage in spread betting on forex markets? The answer is a definitive no, but an awareness of key economic data is crucial to becoming a successful spread bettor.

A Practical Understanding of Currency Strength and Weakness

Fortunately, there are failsafe ways to gauge market sentiment prior to spread betting on forex. Take for example the upcoming FOMC meeting on September 16-17. There is a large degree of uncertainty as to whether the Fed will hike interest rates by 0.25 points. Janet Yellen, Stanley Fischer and other policymakers have alluded to the need for 2 percentage point inflation and strong US growth before a Fed rate hike is implemented. But, policymakers are at odds as to precisely which criteria must be met and to what degree, before a rate hike is put into place. Then there is also the global perspective to take into account: Market weakness caused by the Chinese economic slump, uncertainty with the GBP and persistent Eurozone weakness are cause for concern. Will the Fed enact a rate hike and why does it matter for forex spread betting? These are important questions that do not have definitive answers, but the likelihood of getting it right is improved when you understand the fundamentals.

What happens if the Federal Reserve Bank raises interest rates? Remember that US interest rates determine the rate at which money can be borrowed, or alternatively the rate at which interest is paid on deposited money. When interest rates rise that country’s currency becomes inherently more attractive to foreign investors. Equities markets suffer with interest-rate hikes, so banks, financial institutions and other interest-bearing securities tend to prosper. Foreign currencies will be exchanged for the USD, thereby strengthening demand for the dollar and weakening demand for the exchanged currencies. This is the implication of the upcoming meeting in mid-September. By gauging important market sentiment, reactions and decisions leading up to the FOMC meeting, the likelihood of getting it right increases. We already know that August jobs figures came in under expectations, but that June and July figures were revised upwards. PMI data for the US remains above 50 which is indicative of an expansionary economy. This bodes well for the greenback.

What other Factors Should You Look for when Spread Betting On Forex?

Spread bettors are not only limited to forex, they can also trade indices, commodities and equities. However with forex, many interesting technical and fundamental details can be evaluated for maximum profitability. The actions of central banks, new-home sales, inflation forecasts, GDP growth, inflation figures and even Balance of Trade data come into play. The spreads are also important, with minimal spreads typically attributed to the most liquid currency pairs. These include the major pairs traded against the USD, including the Japanese yen, the Euro, the British pound and the Swiss franc.

Less liquid pairs have larger spreads, making it costly to trade in these markets. The best advice for new spread bettors is to stick to the majors, possibly even one currency pair that you understand really well. The optimal liquidity is between the hours of 8 AM and 8 PM – that’s the 12-hour window Monday – Friday. But it is also advisable to check the overlap times between the world’s major stock markets in London, New York, Paris, and Shanghai. The most active trading sessions will be those that include New York, London and Europe since massive volumes of currencies are traded during that time.

With forex trading you’re always looking for liquidity, and there are certain days when you should disengage from forex trading owing to the lack of liquidity. By far the most important point to bear in mind is knowing when to enter the market and knowing when to exit the market. Stop loss levels are paramount. Even though the general consensus among many novice traders is that spread betting should take place over a short timeframe (days, possibly weeks) there is no reason why you cannot open positions for several months. Following the aforementioned advice will bode well in your introduction to spread betting on currency pairs.