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Your Currency Trading Account - A Real Alternative To Spread Betting
The broker makes his money on the "spread", i.e. the difference between the buying price and the selling price. A typical spread on, say, the GBP/USD is three points. So if the real price is currently 1.4963 then the broker might have a price of 1.4962/1.4965. Whether you go long or short, you first have to surmount this spread, and make three points before you break even. The risk is actually immense. You manage this by placing stop loss levels. If the market moves against you by a certain amount, then you're "stopped out" in order to prevent a possible massive loss. Most purveyors of phoney courses on how to make fantastic profits with forex advise having "tight" stop loss levels, so you never lose more than a comparatively small amount on any one trade. And of course you may have to set small stop losses if your capital is limited. You should never risk more than 5 per cent of your capital, and preferably less, on any one trade. But the trouble with this is that the forex market is so volatile. Prices can swing up and down for any reason or no reason at all. Even if a trend is firmly established, there's nothing to stop a sudden, if temporary, reversal that might go on for 100 points or more, before "retracing". No-one can deny the attraction of spread betting in that it can sometimes lead to sudden windfall profits that are tax-free. But always remember the downside. The odds are against you. So are there any alternatives to spread betting for trading forex? Yes, there are, and I want to mention just one here. They are known as Covered Warrants, and they can be used to trade shares and other forms of financial instrument as well. They were pioneered by the London Stock Exchange, so if either you or your broker aren't based in the UK you may want to check with your broker that they offer this form of trading. You can trade with very small amounts, so starting small until you are used to this kind of trading isn't a problem. You can trade, not only on the currency markets, but on stocks, indices, and commodities as well. You can purchase a call warrant (if you think the market is going up) or a put warrant, for when you think the market will go down. You are allocated a strike price (the price at which you have the right to buy, or sell, as the case may be) and an expiry date. You can sell the warrant before the expiry date if its value has increased. The main advantage of Covered Warrants as opposed to spread betting is that, while they still have the advantage of being highly geared instruments (i.e. you stand to make unlimited profits far more than your capital would normally allow you to) the risk is both fixed at the outset and much less in proportion to the possible gains. And you don't need to worry about being stopped out of the market. There isn't the space to go into Covered Warrants in more detail here, but I urge you to find out more about this highly profitable method of trading, not just currencies, but most other markets as well. It could well save you from losing all your money spread betting the currency markets. Article Directory: http://www.articledashboard.com Philip Gegan is a retired UK lawyer who has studied the financial markets since 1991. You too can make profits such as 70% in less than a week on gold at www.onlinefinancialtrading.com |
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