Spread on forex 4

Chapter 13. Forex Trading EUR/USD Spread Bet Example.

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Let’s take you through a worked example of a spread bet in EUR/USD.

This is the third worked example of three, where we are taking you through the currency trades using spot Forex, a CFD, and a spread bet.

For the sake of our example, we’ll assume our trader wants to go long EUR/USD. This means they think Euros will appreciate against the US Dollar. How they came to that view isn’t relevant for this chapter – but we hope it came from good analysis and was part of a thought out trading plan.

For the sake of this example we’ve assumed the trader is based in the UK, they have chosen to trade with an FCA regulated broker and the currency they fund their account with Pounds Sterling.

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A reminder.

In a currency pair, the first currency in the pair – the one on the left – is always called the base currency. The second currency – the one on the right – represents the quote currency. In Forex trading, you’re always exchanging two currencies. If you think the base currency will strengthen against the quote currency, you would buy the currency pair. Conversely, if you believe the base currency will weaken against the quote currency, you would sell the currency pair. In a quote from your broker, the bid price – also known as the sell price – is where you can short the pair, while the ask price – the buy price – is where you can go long the pair. Spread bets are traded in amounts per point.

Going long EUR/USD with a spread bet.

Our trader opens up their broker’s trading platform, finds the EUR/USD currency pair and opens up a deal ticket for the rolling spot spread bet.

The trader can short the pair at the sell price of 1.13448 or long at the buy price of 1.13454 . Our trader wants to go long because they think Euros will appreciate. The base currency is Euros and the quote US Dollars – this means the price is how many Dollars 1 Euro is trading at.

The trader opens up the market information tab to check a few things. The ‘trade per’ is 0.0001, this means a 0.0001 move in price is one point. So, 1.134 5 4 to 1.134 6 4 is a one-point move – this is important because the trader sets the amount they want to bet per point. The trader decides they want to bet £10 a point – a decent sized bet.

How much margin?

The second piece of information noted from the market information tab is the 3.33% margin required. This ties into the maximum amount of leverage allowed in the EU on a major forex pair is 30:1 (100/30=3.33).

The deal ticket provides an estimate of margin – £3,778 but the trader works it out from the bottom up:

1.13454 / 0.0001 = 11,345.4 points.

11,345.4 points x £10 = £113,454 notional exposure to the pair.

x 3.33% = £3,782.

This checks out – it is not exactly the same as the deal ticket because the ticket only estimates margin. The precise margin, the one we’ve calculated, will be held as a deposit when the trade is placed.

Our trader has £50,000 of trading capital in their account and no other open trading positions so they can fund this position comfortably.

Before placing the trade, in the open deal ticket, the trader sets up a stop-loss order at 50 points. Because they are going long this is set at 1.12954, below the current price. This means, for a £10 a point bet, they are risking £500 – 1% of their trading capital on this one trade.

They set up a limit order 150 points away, above the market price, at 1.14954. This means their take profit target, if hit, will make them £1,500.

The trader is happy with everything so places the Buy EUR/USD £10 a point at 1.13454. The stop and limit orders will be placed at this point as well.

Unlike with the spot Forex or CFD examples, where our trader didn’t have them, with the take profit and stop-loss orders set, the trader can go and do something else, they don’t need to be glued to their trading screens waiting for the price to hit their targets and manually placing the sell trade to close the position.

Outcome 1 – winning trade.

The trader comes back to their account and sees their position has been closed by the limit order set at 1.14954. What actually happened was the price moved through the order quickly, it was triggered and the broker filled the sell £10 a point order at 1.14962 .

The profit on the trade is worked out as follows:

(Exit price – entry price) / trade per = profit (or loss) in points.

(1.14962 – 1.13454) / 0.0001 = 150.8 points.

150.8 points x £10 per point bet = £1,508 profit.

Outcome 2- losing trade.

The price falls and triggers the stop-loss order at 1.12954. The price was again moving quickly and the order to sell £10 a point was filled a 1.12938 .

(1.12938 – 1.13454) / 0.0001 = (51.6) points.

(51.6) x £10 = £(516) loss.

We’ve shown you quite a detailed spread bet here, the points to note are:

The trader does not have to wait for their stop or limit orders to be a trigger – they could have initiated the sell £10 a point closing trade anytime after placing the opening trade. The P&L is always in £, the exposure to the EUR/USD pair is in £ – this is because its a spread bet in £, the trader’s base currency is set when they opened the trading account. The trade was not held overnight, but if it was there would have been a small overnight charge to fund and roll it. The profit would likely be capital gains tax-free. The loss would likely not be tax-deductible. It is important to note the trader is not forced to set stop or limit orders, but it is good risk management practice to do so, so we’ve shown it. The difference between an order’s price and the actual price it is filled at is called slippage, this occurs in fast-moving, illiquid or markets when they reopen.

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