There’s nothing wrong with risk that you understand; that’s the essence of trading. We don’t want people taking risks they don’t understand, though – that’s no good for anyone. We know that most people visiting Core Spreads will already have a good handle on these things. If you don’t, though, don’t be proud – have a read and make sure you understand what we offer and what it could mean for you.
The Forex (FX) markets are the largest financial markets in the world, with almost $5 trillion worth of trade occurring every day, 24 hours a day, 5 and a half days a week. They are the most popular MT4 markets, as traders are attracted to the high liquidity, tight spreads and potential for large gains (or indeed losses).
FX is the exchange of one currency with another. Due to global events (political and economic change for instance), the value of particular currencies will rise (appreciate) and fall (depreciate) against each other. FX traders can make their profits speculating on these fluctuations.
Unlike other types of market, you can trade FX 24-hours a day, 5 and a half days a week. Currency isn’t traded on one exchange like shares, but is traded over the counter, on multiple exchange and in dark pools of liquidity in all the major world financial centres. This means there is likely less gapping risk involved, though some providers widen the spreads at times of low liquidity.
When you trade FX, currencies are quoted in pairs. One currency (the base) is traded against the other (the quote). The base is displayed first (on the left), and the quote is second (on the right). In the EUR-GBP pairing, EUR is the base and GBP is the counter. The price shown is always what 1 unit of base currency is worth in the quote currency.
The movements in the bid-offer prices of FX pairs are caused by the currencies appreciating (rising) or depreciating (falling) in value against each other. If the EUR-GBP price is falling, the EUR is said to be depreciating, whilst the GBP is appreciating. If a trader speculates the base (EUR) is going to appreciate, he buys, and if he believes that the base (EUR) is going to depreciate relative to GBP, he sells.
Normally, in the major FX pairs at least, a pip is the change in price from the fourth decimal place (0.0001). So, if the price of EUR-GBP fell from 0.70423 to 0.70373 it would have changed by 5 pips (0.7042 – 0.7037 = 5).
In FX, the difference between the bid and offer price is called the spread. In EUR-GBP, if the bid-offer is 0.70420 – 0.70428, so the spread is 0.8 of a pip.
In spread betting the ‘Spread’ is in effect the cost charged to a trader for entering and exiting a position. The profit or loss made on a particular trade does not impact Spread.
Many spread betting providers offer variable spreads, some offer fixed spreads but why is it important? When a trader does a spread bet the transaction cost is the spread, and you are effectively charged spread to enter and then to exit a trade.
When you place a financial spread bet, your provider will quote two values, a sell price (bid) and a buy price (offer), based around an underlying market mid point. Spread is the difference between the two prices, the wider the spread the more it costs traders to enter and exit positions.