Can Forex be traded within an ISA?

Returning_officer

Hi,
As a newbie Forex trader just setting out i was wondering please if Forex can be traded within a stocks and shares ISA for example?
I realise the chances of me making any money are less than 10%, but if I do happen to make some then I'd prefer to keep the tax man's greedy paws of the majority of it if possible

bowlhead99

Foreign currency cash can't be held in an ISA.

If you want to speculate on the direction of markets as part of an investment strategy, you can buy funds which employ hedging, and try to add exchange-traded investment products which are plays on currency direction, though some are not allowable. 

If you fancy your changes on guessing the direction of movements you could try spread betting, as betting winnings are not taxable, unlike capital gains made on holding currencies or currency contracts, or on buying and selling investment vehicles. An ISA wrapper is not needed for spread bets.

You are right of course that the chances of you doing it well are really low; most people would use their S&S ISAs to invest in investment funds where the chances of them making money are 90% rather than 10%. 

Returning_officer

Hi Bowlhead,
Many thanks for your reply, what you say makes sense 
I was looking at IG UK to trade currency on a demo account using MT4 to begin with. They offer a spread betting currency method or using CFDs. 
I hope this isnt an ignorant question, but are those methods different to simply trading Forex?
RO

bowlhead99

A spread bet is a bet taken on the movement of a market. Bets can be taken on the movement of currencies (spot rate on the current day), of future rates of currencies (a bet with some future maturity), or on the price of various options to buy or sell currencies in future. The spread bet provider makes money from the spread between the buy and sell prices or the put and call prices on the various bets available. No tax if you win, no tax saved if you lose.

A contract for difference is a contract that can be bought or sold where the value of the contract depends on the movement of the underlying price of some other marketable financial instrument. Profits from buying and selling such contracts are taxable.  When you lose your money by selling your contracts for less than you paid for them, you can offset that loss from other capital gains you have in the same or future tax years, if any. 

If you looking to make money by buying and selling actual currencies rather than using spread bets or CFDs it would involve: 
- the purchase and sale of amounts of foreign currency at spot rates from time to time,
- or more practically the purchase and sale of contracts between two parties to exchange currency at an agreed price and date in the future (a 'forward contract')
- or even more practically the purchase and sale of forward contracts with standardised deal sizes, exchange rates and maturity dates (a 'futures contract') listed on a public exchange.
- or an option contract where you buy or sell the option (i.e. the right but not the obligation) to buy or sell a currency at a given rate and date/time.

'trading forex' may be some part of a job description for a currency trader who works for a bank or other financial institution participating in the currency markets in some way. Generally how we see it here is as a generic catch-all buzzword made up by people who offer methods for customers to put cash into their system in the hope of making money by 'playing the foreign exchange markets' in some way. 

Forex trading is unlike stock trading or stock market investing because stock markets generally rise over time along with the underlying assets and profits of the companies listed on the markets . For example you can make a decision to sell Tesco and buy Sainsbury, and even if Tesco  would have ended up making you more money, Sainsbury can still make you money too, even if it was not the optimum choice, because both are profitable businesses and the economy grows over time.  By contrast, currency trading is a zero-sum game: if you buy dollars against sterling, or buy sterling against dollars, the amount by which you win is felt by someone else losing that amount - you can't both end up with more money in your pocket a few years down the line, unlike if you sold Tesco in exchange for shares in Sainsburys.

So in Forex trading, the only net winner is the person providing the trading operation and taking the commissions; the customers are net losers. And customers without experience or without incredibly deep pockets to allow themselves to hold a losing position until it has an amazing reversal of fortune or lucky moment, generally lose. 

It is like poker where 5% of people know the odds and can play them successfully against all the tactics offered by other players while having enough bankroll to avoid risk of ruin.  Another 20% of the people can take money from the worst 75% but end up losing it to the better 5%, and the best the other 75% of people can hope for is to have a good time while losing their shirt. Within the 75% there are people who don't fully understand the game, the rules, the players or the tactics, or maybe they read a basic pamphlet or book or saw an online video about how to do it, and are suffering from 'a little knowledge is dangerous' syndrome. But they are attracted by the fact that it is exciting to watch your money go up or down, and will be happy with a lucky call from time to time, feeling like they are getting the hang of it, before getting crucified on a surprising move. Hah, that wasn't supposed to happen, they say, as they go back to the bank manager for another mortgage.

The way I'm reading it, you're firmly in the 75% camp, describing yourself as a newbie trader just setting out. You are literally destined to lose and the regulators have demanded that businesses offering the service highlight that most people will fail at this. Incredibly, this just steels the resolve of the people who want to try it, because it's like throwing down the gauntlet and telling them they're not good enough to make money. I'm smart and enthusiastic and as good as any of you! they scream, as they charge into battle, sword raised, not realising the smart guy on the other side gets information about their movements seconds or minutes earlier, oh and he has a nuke.

tropic_of_Username012

Returning_officer said:

I realise the chances of me making any money are less than 10%, but if I do happen to make some then I'd prefer to keep the tax man's greedy paws of the majority of it if possible

1) These imaginary gains would be taxed at a maximum rate of 20%; the remaining 80% is a (landslide) majority in my book.

2) Why do you hate the NHS?

Neil

Having been involved in the gambling and trading business for over 40 years (last 20 years specialising in Forex)  - I would recommend that nobody get involved in such schemes...if you are going to do it learn yourself .....99% of the stuff out there is scammy (sadly) ...they are there to take your money ....N