Popular Currencies to Trade On

Forex (foreign exchange) trading is extremely attractive to novice and experienced traders alike. The prospect of being able to apply local knowledge to a lucrative and dynamic market combined with the extended trading hours that Forex is known for is irresistible. And bigger even than the stock market, Forex is the largest financial market in the world, with a volume of more than $6.6 trillion traded daily, according to Bloomberg.

Using the services of a regulated Forex broker, investors can trade CFDs (contracts for difference) or place spread bets on the price movement of currency pairs. Spread betting is a tax-free option to speculate on the financial market which offers a different way to profit from trading activities than the traditional buy and hold investment strategy. (Please note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.)Traders are equally exposed to high risks of losing their invested capital when engaging in online trading activities of any sort within both bull and bear markets.

• Bull markets – a market in which prices are rising or that are expected to rise.
• Bear markets – a market that experiences prolonged declines in prices.

Similar to traditional stock market trading, a spread bet will quote a bid price and an ask price; the bid price will always be higher than the market price and the ask price lower. The difference between these two prices is known as the spread. if you think the market will move up, you may open your bet at the bid price, if you think it will move down you may open at the ask price. Then, determine the desired bet duration and bet size, which acts as a multiplier per point of market movement.

Finding a comprehensive spread betting platform in the UK means researching for brokers that offer more than web and app versions. Look for a service that offers thorough and detailed charts, a variety of order and execution types and a wide choice of financial instruments. If you’re less experienced in the field, a demo account is the perfect proving ground to see how you would fare with capital on the line, before exposing your capital to real risks.

Another option is to trade CFDs. Although similar on the surface to spread betting, CFDs are distinct in a few key areas. Spread bets are not transferable to anyone else and while CFDs are not futures contracts in themselves, they do have transferable value while in force.

CFD contracts have no expiry date, whereas spread bets do but in both instances, the investor has no ownership of the underlying asset that is being traded. Spread betting is free from both capital gains tax and stamp duty so you don’t need to report any profits or losses to the tax man but CFD losses can be tax deductible, something to bear in mind if trading becomes your main source of income. Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Which Currencies Should You Trade?

The value of a currency is always expressed in relation to another currency and together they make a currency pair. For example, when trading the derivative German index, the currency can strengthen or weaken against another for a multitude of reasons. Currency pairs with the largest spreads tend to have the least activity while pairs with the smallest tend to trade the most. These narrower spreads are a sign of greater liquidity and larger spreads usually convey greater volatility.

The Majors

The most widely traded currency pairs are referred to as the majors:

• EUR/USD
• GBP/USD
• USD/JPY
• USD/CHF
• USD/CAD
• AUD/USD

The EUR/USD accounts for over 20% of all Forex transactions with the other major pairs a distant second place. The EUR/USD began trading on January 1st 1999 and now represents two of the world’s largest trading blocs. Its low spread and high volatility make it a recommended pair for traders of all experience levels.

While the archaic GBP/USD is referred to as the ‘cable’ after its transatlantic submarine cable that was initially used to communicate, the more modern EUR/USD is referred to as ‘fiber’. Because of the 24/7 nature of the Forex market and disparate time zones of the regions involved, traders have had to agree on specific sessions throughout the day – the most popular being between 1300 and 1600 GMT where most movement occurs.

Also known as the ‘gopher’, the USD/JPY consists of the most traded currency in the world, the dollar and the most traded currency in Asia, the Yen. The Federal Reserve System (Fed) is the central banking body in the USA and the Federal Open Market Committee (FOMC) sets interest rates for the dollar – the Bank of Japan (BoJ) is the Japanese equivalent. Any decisions these bodies make will affect the value of one currency against the other and traders need to be aware of this.

Exotic Pairs

Alongside the major and minor pairs( pairs that do not include the US dollar like EUR/GBP, GBP/JPY), exotic pairs involve a major currency and a thinly traded currency. Examples include:

• EUR/TRY
• USD/SEK
• USD/NOK

Trading volume is much lower with these pairs which leads to wider spreads and increased risks. This is usually a deterrent to most traders but does offer large potential rewards. It is recommended that exotic pairs are only traded by those with extensive knowledge of the markets.

The Forex market has its benefits but like any trade also comes with high risks – including using too much leverage while exposed to a volatile market. It’s important to have a good understanding of these risks before investing in any currency pair.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.