Currency Trading Account - Spread Betting Vs Covered Warrants

Looking to open a currency trading account so you can earn all those millions up for grabs by trading in the foreign exchange (Forex) market? Chances are you'll be led in the direction of opening a spread betting currency trading account with one of the hundreds of online brokers out there. But is this really the best option? Covered warrants may be better for the newcomer to currency trading.

Few people who open a spread betting account realise the dangers of losing substantial amounts of their money, even with stop losses in place. You are most vulnerable to losing your money if you don't have a great deal in your account in the first place. Most new accounts have no more than $5,000 (USD) or �5,000 (GBP) placed in them - sometimes considerably less.

As the name implies, a stop loss stops your loss from being larger than an amount specified by you, the trader. So if the price goes against you, once it reaches the point you specified on opening the trade, it is closed. You make a loss, but at least it is a controlled loss, and then you are safely out of the market.

Typical advice from those who supposedly know how to make money with currency trading runs something like this. "Use your stop loss settings to protect yourself against a large loss. Therefore set tight stop losses [20 to 30 pips] so you don't lose too much."

The trouble with this advice is that the currency markets are very volatile. Even when a currency pairing, for example the British pound against the US dollar, is trending up or down over a period of, say, several days, there can still be substantial moves against the trend before the trend re-establishes itself.

Suppose you have just bought into a market that has been steadily going up for some time. You should be quite safe in making perhaps 20 to 30 pips profit, right? In currency trading, though, anything can happen. If you examine a daily chart showing a gain of, say, 120 pips over the 24 hour period, it would not be surprising to see that it was at some stage 30 or 40 pips below the opening price. So if you bought at the start of that period and had a stop loss of, say, 25 pips, you would not have benefited from the increase in price. You would have been stopped out and made a loss.

So is the answer, then, to have larger stop loss settings, perhaps 100 pips? That would certainly enable you to ride the blips, when the price moves 30 or 40 pips against the trend before settling down again. But every now and then there can be a sudden move against the trend that is even larger - anything up to 200 pips or more. And, of course, the trend can change. An up trend can become a down trend, and vice versa.

In those circumstances, you would stand to lose 100 pips or more. Bear this in mind next time you read a dealer's web site that casually invites you to trade at $5 or $10 a pip. This is why currency trading can only be done successfully by people who have not only considerable experience and a successful method, but also an extremely large amount of capital to trade with, allowing them to use large stop losses. Even then, they only risk a small percentage of their capital on any one trade - often two or three per cent at most.

Unless this describes you then you'd be better advised to keep away from spread betting on the currency markets, except by way of a "demo" account, which lets you practice without risking real money.

What can you do, then, to make money on the currency markets? As I've mentioned, one option that is worth considering is using Covered Warrants.

These are financial instruments that are bought from a stock broker, and you can do this online during the opening hours of the stock exchange. The London Stock Exchange has pioneered this form of trading so, if you don't live in the UK, you may want to check with your stock broker that they offer Covered Warrants.

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.

We made 70 per cent on gold in less than a week. You can join us in trades like this at http://www.onlinefinancialtrading.com Article Source: http://EzineArticles.com/?expert=Philip_Gegan