Currency Trading is now one of the most popular forms of market speculation. In its various forms, trading in currencies is accessible to anyone with an internet connection, and a start can be made with a relatively small amount of cash. However, with four main methods of trading or betting available, the beginner is faced with the decision of which one to choose.
Below we are taking a brief look at the factors which may govern a beginner’s choice of platform for currency trading, and in doing so we hope to provide pointers which will hopefully inform a beginner’s decision as to which platform to choose. Having said this, initial choice of platform is not an overriding imperative, as demo accounts are available through the many brokers, negating the need for a newbie to part with their cash before using the platform.
But, why waste your time signing up for and learning to use demos for all the potential routes when only one or two may be all that is required? The following sections attempt to address the choice issue, be it a real live, or a demo account choice, and in the process save you some time.
Your choice of trading or betting platform should be based on several main factors; your personal financial circumstances, market knowledge, market experience, available time, and your powers of self-discipline and money management (this list is not exhaustive). Before applying these factors to platform choice, a brief but necessary look at a couple related issues is in order.
Financial Trading or Betting?
Described invariably as financial betting and financial trading, these descriptive terms covering the different forms of currency trading are from a punter’s viewpoint partially moot. Currently from a taxation perspective they are all considered to be gaming and are therefore exempt from capital gains tax, which also means that any losses cannot be claimed back as a tax write-off either. (Legislation governing the taxation does not appear to be in danger of changing in the foreseeable future).
In short, the distinctions of trading and betting are misleading, as it is all gambling, but how you choose to play the currency markets defines whether or not you can describe your own activities as more of a betting or more of a trading activity. A smart trader can make a fortune from spread betting, and conversely, an inherent gambler can potentially lose a fortune through the safer options of Forex, or Fixed Odds Financial Betting. It’s all up to you!
The different trading platforms may not be specifically geared up towards the psychological types of individuals in playing the markets, however each trader or player’s psychology will in part define their performance, and their choice of currency trading platform. Spread-betting is more risk laden and is therefore likely to attract a less of a ‘thrill-seeking’ trader than for example Forex. This does not necessarily mean that a punter engaged in spread betting is a congenital risk taker, as this method can be highly profitable, and is arguably a good choice of platform for a trader who knows their market or markets inside out.
Some spread betting firms offer stop loss and no stop loss accounts, the latter allowing the punter to place larger bets than the former, and it doesn’t take Einstein to figure out which one a trading newbie should choose. Fixed odds is perhaps the safest bet – but it is still gambling, although gambling with a small ‘g’ in comparison to other platforms.
How Many Trading Platforms?
If you are new to the game, then perhaps a two-pronged approach to trading may be in order. The downside of this approach is that you will have to learn the software of at least two different brokers or firms. Having said this, with the amount of competition out there, most firm or brokers are doing their utmost to update their software to make it as user friendly as possible, so getting to grips with the trading software is not such a big deal, although you will probably need to develop a dual money management system, even if you are dealing with demo accounts.
Virtual Dollars are obviously not real, however the financial implications for the future in relation to how you manage your virtual dollars are. A beginner who opens a real live account with their virtual account intact or at least not in the red, is in a far stronger position than a beginner who has lost all their virtual dollars without realising their true ‘learning value’.
Choice of Trading Platform Or Platforms
So, have a read though the currency trading platform overviews below and hopefully you will have a clearer idea of which trading platform(s) is more suited to you as an individual.
Currency Trading – Forex
Midway on the sliding scale of trading risk, Forex trading has the advantage of variable leverage which means that it can be entered into without a large amount of capital. Setting of stop loss can also reduce the potential for big losses. Trading with high leverage on small trades means that the beginner should be careful of placing bets on too volatile a currency pair, as a brief but rapid swing will shut their trade down. If you are not sure which currency pairs are the most volatile, we would be doing you a dis-service if we told you! It would be far better for you to look at your brokers’ currency pair performance graphs, and make up your own mind as to which pairs are the least active, and therefore the safest to trade (Assignment 1!).
Automated Trading Systems are available on higher level accounts which means that you can walk away from your screen while autopilot takes over. If you cannot afford this luxury though, and even if you apply your ‘stop losses’ and ‘take profits’, you will need to be vigilant while trading as on occasion you will be able to view a rapid swing that for one reason or another is obviously not stopping, so you might as well close out manually before the 80% or whatever of your stake is pointlessly swallowed up. With most Forex brokers stop losses and other risk options can be altered without opening another trade, but, you have to be there to do this – so keep your eyes on the screen.
Some brokers offer more automated functions that reduce the need for continual screen surveillance, but a beginner should get their head around the basics before treading this path. Learn to walk before you can run! Forex can be quite profitable without the need for large capital, but while the risk factor is not too high, money management is important, as is self discipline.
Great for beginners, as whilst the element of excitement is there, so is the safety net. If you feel this method may be suitable for you, have a look at What is Forex Trading?
Currency Trading – Fixed Odds Financial Betting
Fixed Odds is the safest form of trading, as your loss is limited to the stake you put on, so if you can’t afford to lose, you don’t put the bet on in the first place because you have to provide the cash upfront. This would appear to be the same as spread betting in that you know your potential loss form the start, but it is not the same. The margin (or Min IMR) required with spread betting means that unless you have a stop loss, a £10 bet is more often than not in a £400 stake in reality. With Fixed Odds what you see is what you get, which means that money management is a lot easier, all variables are evident and clear.
As no margin is required, Fixed Odds suits the more limited budget and is a good way to get to know the markets. Time is less of an issue as there is very little or no opportunity to close fixed bets once they’ve been opened, so you don’t have to follow the products performance. But then again, although time is not a demand, it is always wise to invest time in fully researching your currency pair and surrounding influencing factors such as announcements before placing your bet. There is still the opportunity for risk taking, but again you are only going to lose your stake, not a multiple 30 times thereof!
Highly suitable for a beginner who does not have high capital back-up. If you want to learn about fixed odds, see What are Financial Bets?
Currency Trading – Spread Betting
In contrast to Fixed odds, Spread Betting can be the ‘King Of Risk’, but, with such potentially huge wins in the pot risk goes with the territory. This does not mean that spread betting should be avoided, but it does mean that caution should be observed. Margin is required to place spread bets, so to make any substantial wins you need the capital in the first place. The way margin works means that, outside of exceptional circumstances, you can generally only win the amount of margin you are using to cover the bet in the first place – a perfect example of ‘money brings money’. (Min IMR is based on potential loss, an inversion of potential win).
Although wins can be very big indeed, this is no ‘get rich quick’ platform, as again, to lay the big bets you need the big cover. There is no ‘get rich quick’ platform. Period. All trading is an accumulative process, a successful trader is one who plays the long game, if you hear any different don’t believe it! Beware, there are plenty of Phineas T. Barnums out there! From a discipline and money management perspective, stop losses mean that spread betting is protected to a certain extent, but you need to create a hard and fast plan and stick to it. Don’t be tempted to up your game until you truly are ahead of it.
Time can be an issue as the markets can move so quickly that you need to keep your eyes open – especially at the beginning. Market knowledge and experience come into play particularly with spread betting, as it stands out as the most potentially dangerous platform, and it is therefore a distinct advantage to have some previous nous if placing mid-range or higher bets.
Overall, spread betting is the province of the experienced trader or the beginner who has got the sense to start with low stakes. If you think you have the self-discipline to make good amounts of cash without blowing the children’s Christmas and Holiday Fund and want to find out more see What is Spread Betting?.
Currency Trading – Binary Betting
Binaries are a ‘safer’ form of spread betting that manage to offer fast high profits with a default cap on losses. When you put a binary bet on you know exactly what your potential profit and loss limit is. It is also easier to gauge a bet’s feasibility or ‘risk reward ratio, and therefore easier to decide whether or not to put the bet on in the first place which is a distinct advantage. You can also close out early to retain profits or cut losses, which you generally can’t do with Fixed Odds.
One drawback from a financial perspective is that you do need margin, so, if you want that big win, you need the capital back-up to place the bet. Bets can be closed out early, but you do need to be there to close the bet, so there won’t be any nipping down the pub unless you are mobile trading. Discipline is again an issue as it is very tempting and easy to up your stakes after a lucky run, the result of which could be potentially disastrous.
All things considered binary betting offers the opportunities and excitement of spread-betting, whilst being subject to a mandatory safety net. Binaries are suitable to the beginner who is a bit adventurous, but who at the same time needs the safety net just in case they get carried away.
If you like the idea of high gains from low stakes, but want to know beforehand what your absolute maximum loss could be then have a look at What are Binaries ?.