Getting the Best Deals in Forex

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Where to get the Best Deals

When it comes to trading foreign exchange (forex), Johnny Retailer now gets virtually the same deal as Billy Big Trader at Humongous Bank plc. And with over 200 companies quoting forex prices, we are spoilt for choice.

Despite the keen competition, anyone thinking about trading forex still needs to examine carefully what's on offer. On the table (click here), we list the biggest forex specialists in the UK, outlining their typical spreads, funding costs, margin requirements and policies, order types and any added-value services offered to clients.

Check the Rates

UK spread-betters have done a fantastic job at taking many types of financial instruments, including forex, out to a wider audience. The attractions of forex spread-betters are accessibility, ease of account opening, simplicity of trading and margining, and the fact that any profits are tax-free. But although spread-betters' prices are generally competitive, closer rates are often available elsewhere. For example, Oanda quotes a 1.5 tick price on EURUSD, and also allows clients to post orders in 'pipettes'.

In other words, when OANDA is quoting a two-way price of 1.28200-1.28215, a customer can put an order in to buy at 1.28202. While this price will not be displayed to Oanda's other clients, it offers a discrete level of execution potential that the spread-betters do not currently match.

Consider your Method of Trading

Another factor to consider is the way that you intend to trade. If you believe that you will open a position, it will move 100 ticks in your favour and then you will take the profit, then spread-betting might prove the most cost-effective solution as there will be no tax to pay (only a factor if you expect to make capital gains of more than £8,200 in one financial year).

On a typical retail-size trade of the equivalent to E500,000 or £500,000, the profit from making a 100-tick gain in EURUSD or GBPUSD is $5,000. However, currencies seldom move in straight lines, and the tightness of spreads and good liquidity encourages more active trading. The cost of dealing on a 3-pip EURUSD price, instead of a 1.5-pip price, is $75 each time a deal is transacted (assuming a E500,000 trade). For regular 'jobbers' of the market, these extra costs will undoubtedly add up, and may erode any benefits of not paying tax.

"If you are actively trading forex, you have to look at all the costs of trading, and the spread is very important," says Richard Olsen, chief executive of Oanda. "Many spreads are too wide for active traders. As the retail market gets more sophisticated and knowledgeable, which it is doing, it will not remain a viable business proposition for service providers to quote a price, and just back it out with a bank and lock in an automatic profit."

And never forget that tax is only paid on profits. While few forex service providers will say how many clients lose money, there is a high attrition rate. Anyone considering forex has to realise that there is a real likelihood of losing money, especially at first.

Some Words of Advice

"Forex is a risky game to play," admits Stephan Martinussen, co-head of sales trading at Saxo Bank. "I believe investors should consider different asset-allocation strategies, and diversify their funds."

But he takes it a stage further, pointing out that different strategies can be adopted, even within a single asset class. "Forex traders should consider having some money running longer-term currency positions, and some on short-term speculative plays."

As all responsible banks do, Saxo makes a point of highlighting the potential pitfalls of forex. It provides additional services, such as a simulated trading game for novices, fundamental and technical research and transparent margining requirements for greater risk management. It even offers a service called 'TradeMaker', which recommends trading ideas and strategies to clients, including where to take profits and losses. It believes that this helps novices develop strict trading discipline, which most professionals view as essential for success.

Mr Martinussen's suggestion that investors should actually look at various strategies, including shorter-term jobbing, underlines the fact that forex players tend to trade actively. Therefore, the total cost of trading is extremely important.

Holding longer-term positions raises another issue - the cost of funding. If spot positions are not closed out on the day that they are executed, they will have to be rolled to the next value date. The cost of doing this varies dramatically from provider to provider, and it can have a big impact.

Oanda has come up with a nice solution to rolling positions. It pays or debits customers in real-time (down to the second). So if you buy a high-yielder, you will receive credits to your account throughout the day.