What is Fixed Odds Trading and How Does it Differ From Spread Betting?

 

Fixed Odds trading is essentially speculation on the outcome of an assets future price movement. You don’t actually own the physical asset but you place a trade to take advantage of its predicted price movement.

If for example you think that the FTSE Index of leading shares will fall over the next two weeks, you could place a trade to profit from this move. Or you might think that Sterling (vs the US Dollar) will not touch1.70 over the next 15 days, again you could place a trade on this outcome.

First, you check the odds (percentage return) that the broker is offering for your desired (price) level, bet type and selected time frame. Then if you are happy with the return being offered you place the trade. If your prediction proves to be right at the end of your selected time frame you receive your profits. Maybe you traded to make a 25% return from this movement, maybe 40%, 100%, 300% or even more!

On expiry, profits are instantly credited to your account and can be withdrawn or used for your next trading opportunity.

The configurable time frame for your trade means you can simply ‘dip’ into the markets as and when an opportunity arises. This allows you to profit from short term movements without being committed to holding an asset even if the market turns against you.

This differs from traditional forms of trading such as Spread betting and makes it better suited to most traders, especially in volatile markets.

With Spread betting, money is bet per point (per pip for currencies). The level of stake for each point of movement is set by the trader subject to the minimum limits of the broker. These limits will vary but are often 1 – 50 dollars per point depending on the market traded. For a buy trade, a profit is made for every point the market moves above the placing price and a loss is incurred for every point the market moves below the trading price. A sell trade simply operates in reverse. When the trade is closed the total number of points moved is multiplied by the stake placed. This determines the profit or loss from the trade.

For example an 80 pip movement in your favour on the GBP/USD exchange rate at 5 dollars per pip, would net a return of:

80 (number of pips moved in favour of trade) X 5 (stake per point) =+400

So if you had called the direction of the market correctly then this would be your profit.

However if you hadn’t and the market moved 80 pips in the opposite direction to your trade, then this would be your liability or loss.

80 (number of pips moved against trade) X 5 (stake per point) = -400

In fact you are liable for all losses incurred until the trade is closed! In a fast moving (or even gapping) market this can be a very dangerous strategy, even with a Stop loss in place! So while Spread betting offers the potential to make high profits, the flip side is that you could also be liable for unlimited losses!

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