Find your feet in foreign exchange and commodities

Joe McGrath helps you take the plunge from spread betting into deeper waters

As the spread betting market has grown, so too has the number of day traders trying their hand at more sophisticated markets for the first time. So it is, perhaps, unsurprising that people are eventually gaining the confidence to try the more complicated markets such as commodities and foreign exchange (forex) too.

Last week, dedicated forex broker FX Pro released its business volumes to market, noting that 2010 was another record year in business development terms for its FXPro.com platform.

The company confirmed that volumes had grown 20 per cent from $440bn (£276bn) in 2009 to more than $530bn year on year as more and more retail traders realised the potential in the sector.

Providers in these markets look set to increase their volumes still further this year as day traders wake up to iPhone, Android and Blackberry applications that make trading on the move easier. However, it is only recently that providers have started to spend more on customer education. This has happened in response to growing market competition and widespread recognition that customer acquisition and retention policies need to change.

Michael Hewson, market analyst at CMC Markets, explains that spread betting companies in the past have been poor at educating customers, particularly in markets that are perceived to be more complicated.

He says: "Spread betting as a rule has had a very high churn rate and clients have moved from one provider to another. There was no brand loyalty and, as soon as they were let down by one, they moved on to the next. Education was a big part of that. We are looking to teach people by not just introducing them to the market but placing importance on longevity. It makes sense – if we can keep a client on board for longer, they will trade more. I have never understood the concept of the providers who take the money and are not concerned when investors lose it."



Beyond the comfort zone

When the UK spread betting market was in its infancy, Hewson says there was snobbery around trading and this spilt over into education. He explains: "When I first started out in trading, I found it very difficult. A lot of people try to make out it is more difficult than it actually is. I have always been passionate about education." Hewson recommends that novice investors stick to small trades in the mainstream markets to build up their confidence before moving into more complex markets: "You must choose your markets carefully when you first start out. Foreign exchange is not for novices and you have to scale up your trading methods. You must always know what your worst-case scenario is."

However, for those people who are ready to take the next step, there is plenty of information across the internet about the current trends in each individual sector to help you get started with your research. When most people first start trading using contracts for difference (CFDs) or spread betting, they normally start with equities, because they are already familiar with dealing with an index like the FTSE 100 or with individual companies, such as Barclays or BP.

However, David Jones, chief market strategist at IG Group, says that forex has been the market that people have been keenest to move into over the past year, with big month-on-month increases linked to major news events.

"Volatility and the opportunities that it offers have been the big draw for most people. The past few months haven't been disappointing, with the Irish debt crisis ensuring there was seldom a dull day for many currencies.

"The euro was something of a one-way bet back in November, dropping 1,300 points in the month. It has come back into focus again over the past week, as traders seem to be taking the view that the worst-case scenario has been avoided. The euro is likely to remain a volatile currency and still be heavily traded for a few months to come as the sovereign debt crisis rolls on."

It is not just the euro that is experiencing an increase in trading patterns. Sterling is also popular at the moment, according to statistics from both IG Group and CMC Markets, and most companies have seen some steady buying of the currency since it fell to a three-month low in December.

With inflation running high and pressure continuing to build on the Bank of England to raise rates, traders are likely to be keeping a close watch on this currency. Daniel Harris, head of dealing at H20 Markets, expects sterling to fall back. "The Bank of England is less likely to raise interest rates so soon as it needs to see the domestic economy is healthy enough for it to do so. There are a range of factors that can cause slack in the economy – prolonged high unemployment, a slower pace of wage increases with inflation, rising input cost for UK manufacturers and high spare capacity margins."

Meanwhile, Jones believes that the Australian dollar is also likely to see considerable interest, because of its high correlations with commodity prices. "It had a great run-up last year from the summer of around 2,000 points – a rise of 25 per cent against the US dollar by the end of the year. However, it has been knocked back recently as traders weigh up the economic impact of the floods," he says.

"That said, in recent days there seems to be a feeling that this is just a buying opportunity before the next spurt higher against the US dollar. Commodity prices, China and mining activity are all going to have an impact on the Australian dollar and these are big themes for the economic recovery and likely to be popular this year."

Although forex trading is gaining in popularity, it is not the only sector. Precious metals have seen a rise in activity by retail traders, which has also driven by news events.

Hewson explains: "Gold, silver, oil and copper are the ones that have been in the news. We have also seen some interest in soft commodities, even though liquidity can be difficult. Also, the spreads are quite wide."

However, Ed Ennis, head of commodities research at Rothschild Private Bank, says traders may have been surprised with the relatively poor performance of gold since the beginning of the year. He says: "Gold prices have struggled to gain new ground, falling back by 3.8 per cent from their year-end level. This happened in an environment of US dollar strength and encouraging US macro data."

However, Harris believes that gold and silver prices will climb again through the year. He says: "Macroeconomic factors raising metal prices from previously high levels are likely to remain in place as ongoing drivers this year. These factors include the rising inflation and currency appreciation of China, the second largest gold consumer and robust demand for bullion as a hedge."

Harris argues that there may also be opportunities in other areas. He says: "The rally in commodity prices, particularly in copper and iron ore, has been driven by a combination of anaemic supply and robust demand from emerging markets, particularly China.

"Speculation that China may raise interest rates to address rising inflation have made commodity miners vulnerable to a consequential fall in metal prices. However, China seems to favour administrative tools rather than interest rate rises.

"Such measures include a rise in the reserve requirement ratio, subsidies for consumers and a crackdown on hoarding agricultural commodities. These policies are less likely to constrain the nation's appetite for investment, therefore putting less pressure on commodity prices this year."



Understand this

These market analyses illustrate the level of understanding that commodity and forex traders need before placing their trades and further underline the points that novice investors should steer clear of.

However, there is no question that spread betting providers have opened up access to these markets, which traditionally were closed to the retail community because of the large cost barriers to entry. Despite this, novice traders can all too easily be swept up in the excitement of making gains, only to lose them very soon after.

Hewson explains: "You see both sides. You remember clients who have a hot streak. I remember one client who made six-figure sums very quickly and then just as quickly gave them back again. You are going to have bad trades, but you need to acknowledge that you will lose money from time to time. You must have an exit strategy."

Hewson recommends using your own money to build confidence in new markets instead of practice accounts, however. He says that demonstration accounts may be useful for starting out, but stresses that investor behaviour can be very different when they are trading with their own money. "Using a demo account is completely different to using your own money. Your mindset is go long, go short and you don't care if it goes up or down. You tend to call right, because you are in a relaxed frame of mind," says Hewson.

"When it is your wallet, you can't work out why you are losing money. It is because you are a lot more cautious. If you employ trend lines, start small and understand why markets trend and range, you will do better. Employ the use of risk management tools and know what is a realistic stop loss. It can also help to get training from people who are well regarded [in the industry]."

Researching the available training in new markets can be just as beneficial as researching the providers, says Hewson. "This is a big concern. All spread betting companies offer training and all the books talk about risk/reward strategies, but if you have a small capital amount, these may not work," he explains. "You have to use your discretion. If you use a financial adviser, you research the available advisers, so why should trading be any different?"

Specialist social networks, made available by providers such as eToro, have become popular more recently. With these, new traders are able to ask questions in a forum environment and network with other traders to pool knowledge and share their experiences.

Jonathan Asfia, chief executive officer of eToro, says traders believe that social networking leads to greater trading volumes. "According to Datamonitor, 50 per cent of consumers are using online tools to make their financial decisions today," he says. "Through the use of social media a novice trader [is able to] interact directly with other more experienced traders, to learn from their advice, observe and copy their trading choices [as well as] to gather useful hints and tips from other similar traders on the network."

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Life and Style
life
News
Melissa and Joan Rivers together at an NBC event in May 2014
peopleDaughter Melissa thanks fans for 'outpouring of support'
Life and Style
tech
Life and Style
One in six drivers cannot identify a single one of the main components found under the bonnet of an average car
motoringOne in six drivers can't carry out basic under-bonnet checks
News
i100
Voices
Pupils educated at schools like Eton (pictured) are far more likely to succeed in politics and the judiciary, the report found
voices
News
peopleWrestling veteran drifting in and out of consciousness
Arts and Entertainment
Shady character: Jon Hamm as sports agent JB Bernstein in Million Dollar Arm
filmReview: Jon Hamm finally finds the right role on the big screen in Million Dollar Arm
Finacial products from our partners
Property search

A student's guide to financial survival: You don't have to drown in debt at university

Fresh from A-level delight, the moment does not have to be soured by students resigning themselves to thousands of pounds worth of debt in three years' time. Rob Griffin sees how to pass the university challenge

'Dismal' eurozone data sparks concerns

European Central Bank chief Mario Draghi is under pressure to launch promised stimulus before the EU slides further
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Fuel poverty campaigners united in criticising the delays in helping those in fuel poverty

Plans to tackle fuel poverty are slammed by campaigners

Charities and action groups believe that the Government's proposals are woefully inadequate
Sell it with flowers: competition is 'intense' for homes with outside spaces

Gardens add a tenth to the value of your home

A London estate agent yesterday put a price on having a garden. David Pollock of Greene & Co reckons it can increase a property's value by a tenth.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Consultants - Banking & Finance

    £20000 - £30000 per annum + OTE £40 - £50K first year: SThree: SThree Group an...

    Business Analyst,HR,Halifax,£400-450pd

    £400 - £450 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Recruitment Consultants - IT - Trainee / Experienced

    £20000 - £30000 per annum + OTE £40-50K first year: SThree: The SThree group i...

    Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

    £300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone