Forex or FX stands for foreign exchange. Forex trading means speculating on the value of a currency with the belief that the currency will rise or fall against another. For many currency traders Forex spread betting is a convenient and tax-free* way to trade their chosen currency pairs.
In a Forex trade, you buy (go long) one currency while simultaneously selling (going short) of another. This is known as a ‘currency pair’. Currency pairs include the US Dollar / Japanese Yen (USD/JPY) and the Euro-US Dollar (EUR/USD), although there are many more major and minor currency pairs available.
With Forex spread betting trades, you speculate on a ‘value per point’ basis. Put simply, you might decide to ‘go long’ GBP against USD at £1 per pip. This means that for every pip the currency moves in your favour, you make £1. Conversely, you lose £1 for every pip that the market moves against you.
Unlike with equity or commodity spread betting where a trader speculates on the price of a single underlying asset, Forex spread betting is traded in pairs. This is because when a currency rises in value, the rise must be relative to another currency.
The ‘unit risk’ or ‘pip value’ varies between currency pairs. For example, the unit risk (i.e. value of one pip) for Forex spread betting on GBP/USD is 0.0001 . A full list of contract details for all currency pairs can be found on our market information sheets.
You think that GBP is likely to strengthen against the USD. Let’s assume the current Forex spread betting price is 1.8006 – 1.8014.
You decide to buy (i.e. go long) at 1.8014 for £3 per pip.
You decide to close when the bid price reaches 1.8114. Your profit is the difference between your opening and the closing price, giving you a profit of £300 (100 pips x £3). In this example, you would lose money if the GBP had weakened. Had the GBP fallen against the USD by 100 pips, a £300 loss would be realised.
Forex is a leveraged product, and can result in losses that exceed your initial deposit. Stop-losses are available to help manage your risk exposure.
*Under current UK tax law. Tax laws may be subject to change.