Currency trading in your 50s: how can you cash in?

When someone tells you that something is worth $5.3 trillion (£3.5trn) it can be a little hard to take in.

According to the most recent BIS survey, that's exactly how much the global currency market is worth – every day. It's a busy place. It's also the biggest financial market in the world.

More than 95% of currency trades are pure speculation: banks, brokers, fund managers and retail traders betting on the direction of currency movements in an effort to make a profit.

It isn't really something to embark on unless you're already in the stock market, but can be lucrative if you know what you are doing.

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Foreign Exchange (Forex) platforms that allow individuals to invest in and trade currencies have enjoyed burgeoning business in recent years. Household names like Citi, Saxo Bank and Hargreaves Lansdown offer Forex trading services. Popular specialists include IG Group, CMC Markets and FX Pro.

What is spread betting?

Spread betting is about making money from the difference – or the 'spread' – between a start value of a currency and its finish value, effectively allowing someone to profit from a fall or rise in a price.

Typically, it works by staking £x per 'pip' based on values to four decimal points where 0.0001 equals one 'pip' or basis point (some brokers now offer fractional pip pricing, i.e. five decimal places, making for tighter, more accurate spreads).

If you stake £1 per 'pip' and a currency pairing, such as sterling/euro, starts at 1.3000 before rising one 'pip' to 1.3001 you have made £1 (prior to the transaction fee). A rise to 1.3100 nets you £100.

When spread betting, currency traders will typically borrow more than their initial deposit amount – backed by currency trading platforms – in an effort to maximise profits.

If the market swings in an unexpected direction, traders can not only lose their deposit but face a 'margin call', sometimes immediately, for the additional losses sustained.

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Currency fluctuations

Recent news has given us a flavour of the risks in currency trading. The decision by the Swiss National Bank (SNB) to stop pegging the franc to the euro caught a lot of currency traders by surprise – and cost a lot of people a lot of money.

"The events of the last few weeks have tarnished a lot of risk appetite," says Brenda Kelly, chief market strategist at IG.

"If you're completely new to trading, the first thing I would say is not to start with forex. Start with stocks. Get used to managing risk with a less volatile asset class, something that won't swing triple digits in a day – or even an hour."

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Trading surplus or unlocked pension capital on the currency market is not a usual occurrence, practitioners admit, and people in their 50s are less likely to take risks.

"Typically, those in the 50-plus demographic are less risk incentivised, so will more likely look to defensive stocks during a period of uncertainty such as this," Kelly says. IG's client base, albeit with plenty of variation, tends to be sophisticated traders in their late 30s and early 40s.

How to learn more about currency trading

Still, if you feel familiar with trading, firms like IG can help with webinars and educational programmes. An IG team member will take you through a day's trading – through economic data from bonds to retail sales – in order to determine what's useful.

Like many investment advisors, Hargreaves Lansdown provides spread betting and CFDs as part of a wider offering. A currency conversion service is available for buying and holding lump sums, while clients can also gain indirect exposure to currency movements via mutual fund investments, such as overseas stock or bond market investments.

"Many of the large UK companies on the UK stock market will have operations overseas and their fortunes can also be impacted, positively or negatively, by currency movements," Saint explains.
High street banks charge a small fortune for buying and holding a lump sum in a foreign currency. Specialists offer the best rates, although you'll need to do your homework – size is often a good indication of value, the larger the better.

On a typical £10,000 sterling/euro transaction you might expect your exchange rate to be within 1.5 cents of the interbank exchange rate (e.g. 1.2850 compared to an interbank rate of 1.3000). The rate could be better on larger transactions. A high street bank might offer 1.25 or even lower.

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Spread betting fees

At Hargreaves Lansdown, there's no account-opening fee, then a £15 transaction fee for amounts under £10,000.

The fees on spread betting depend how long the bet is kept open. The buy rate is higher than the sell rate (so the broker makes a profit) and then there is a fee for financing depending on the duration of the transaction.

If the transaction is open for a day or two, the financing charge will likely be small. For quarterly bets for up to three months, it could be 8-10 pips for many of the major currency pairs.

Some brokers and spread betting services offer a 'play money' option usually in the form of a demonstration account. With others, a full account would need to be opened first – although often there is then the option to trade on paper. Free guides and online tutorials are also readily available.

Make sure you ask your broker about any variations that may not be picked up in the demo account, Saint notes.

As ever, the key is to understand the nature of the endeavour. "This is trading, not investing," IG's Kelly reiterates. "It's not about being right all the time – it's also about understanding when to sell at a loss. Know your exit plan before entering a trade."

Why foreign exchange trading is popular

Why the popularity? Investing in currency is another way to diversify your portfolio – the correlation between currency and other asset classes, such as equities, is low.

How you access the Forex market, however, will depend on what you need it for. A currency or payments specialist is useful where there is a specific, non-speculative purpose, such as buying a property abroad.

They can also be a frugal option if you want to take a longer-term view on the currency market, for example buying and hold foreign currencies in a bank account. There are speculative trading services such as spread betting or Contracts for Difference (CFDs) that can help with this.

Spread betting and CFDs are where the real money is made – when someone refers to currency trading this is usually what they mean.

Be aware of the risks of forex trading

But don't go lining up your surplus capital just yet. Spread betting and CFDs also brought about some of the financial world's biggest blow-ups and is why Forex specialist websites come with "losses can exceed your deposits" warning.

"Before any contract is entered into the client needs to be aware of the risks associated with the position they are taking in the Forex market," says Chris Saint, a private client account manager in Hargreaves Lansdown's Currency & Markets division.

"Historically in the UK, it's been hard to market pure Forex trading services because of the high risks which can be involved and were previously available only to sophisticated investors."

All Forex platforms offer speculative trading – typically through a brokered CFD or a DIY, spread betting service.

Read more on High50:

It's never too late to invest in the stock market

Forests? Coins? Unusual ways to invest your money

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