How to make money spread betting
Spread betting is perhaps the most straightforward (as well as being one of the cheapest) ways to speculate on financial markets.
How it works
You can bet on loads of different things such as the share price of individual companies, movements on commodities like oil and gold, currencies, bonds and global stock indices like the FTSE, German Dax, Japanese Nikkei and US Dow Jones Industrial Average. In addition, unlike some forms of financial speculation, you can profit from the price of an asset going down as well as up.
Of course, nobody takes up spread betting to lose money. And while spread betting is relatively straightforward to understand, it still takes time and application to work out how and why the underlying markets fluctuate. After all, spread betting is just the process. To make money you have to bet in the right direction and then choose your moment to book profits.
It’s a good idea to start with a demo account. Most brokers offer demo accounts where you can try out the trading platform, work out different strategies and get the hang of everything before risking real money. The last thing you want to do is lose any of your hard-earned risk capital learning something new. Make sure you get the best out of your demo account: it is fine to dive in and out of different markets while you get the hang of the platform, but after that treat the demo as a real money account. In other words, consider the fundamentals and technical set-up before you place a “dummy” trade and take the time to learn how to use stops and limits.
Once you’re ready to move on to the real money account make sure you start small, and build your confidence slowly. The learning curve takes time and perseverance. But if you manage to follow some simple advice, you will quickly build a strong base from which to grow your account once the knowledge and experience kick in.
To begin with, it is worth focusing on just a couple of markets rather than a large number. This is so you can build up your knowledge about how particular markets work and how they react to news flow, economic data releases and technical trading levels. You also need to create a trading plan. For professional traders a trading plan which includes strict money and risk management is the key to maintaining a long and profitable career. This is just as true for spread betting as any other trading vehicle.
It’s important to remember that even the very best traders don’t win every time. So they make sure that when they do suffer a loss (or even a string of losses) they still have sufficient risk capital to carry on trading. They achieve this through disciplined money management. In its simplest form this means dividing up your trading capital into smaller parcels. Then you only risk a proportion of your funds on any one trade. How you divide up your risk capital is up to you. But it will depend to a large extent on the size of your spread betting fund. Some professionals say you should risk no more than 1% on any one trade. Others say it can be up to 5 or even 10%. Obviously, the lower the percentage, the more trades you’ll be able to place. However, if you only have a small amount of risk capital then there are likely to be many trades that you shouldn’t do once you factor in the minimum bet size and your stop loss.
This brings us on to risk management. Good risk management involves using stops and limits to help you plan and manage your trades. This provides structure and brings discipline to the whole process and takes some of the emotion out of trading. This is where charts come in. These are vital when it comes to establishing if a market is trending or ranging. Charts also help you identify areas of support and resistance which should be used as a basis for choosing stops and limits. If these terms are all new to you then it is worth putting in some study at this point. For instance, it is never a good idea to trade against the prevailing market trend. Likewise, if a market is stuck in a range it’s important to identify the tops and bottoms so you can avoid buying or selling at the wrong time. Drawing tools such as trend channels, Andrews’ Pitchfork and Fibonacci Retracements can help you identify if a market is trending and also identify significant areas of support and resistance.
As with any other speculation or investment, it is important to do your homework. Consider the fundamentals but study the charts as well. Never spread bet with money you can’t afford to lose, and don’t risk too much on a single trade. Fortunately, spread betting allows you to make relatively small bets on financial products.
Finally, it is often said that your mental capital is every bit as important as your financial capital. Having a trading plan and employing solid money and risk management techniques all help to take the emotion out of trading. This will help you maintain a disciplined approach to spread betting and so preserve your all-important metal capital as well.
Hopefully these rules can help you make money when you begin spread betting:
Practise on a demo account
Focus on 1 or 2 markets
Pick liquid markets with tight spreads to keep your trading costs low
Devise a trading plan
Be disciplined: don’t be tempted to move your stops further away from their original levels
Never add to a losing position
Never spread bet with money you can’t afford to lose