Find Your Feet in Foreign Exchange and Commodities
McGrath, Joe, The Independent (London, England)
Spread betting International markets 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. …