Spread Betting strategies
Spread betting is a relatively straightforward way of backing your judgement on price movements in financial markets.
You can spread bet on all kinds of financial instruments including individual equities, stock indices, currencies, bonds and commodities. You bet in a currency of your choice either sterling, euros or US dollars which means your profits and losses are also in your preferred currency. This helps to simplify your account and gets rid of the need for currency conversions.
But while the spread betting process is straightforward, making sure you’re consistently profitable is less so. This takes some time, thought and effort. Hopefully the following trading guide will prove a useful starting point.
Employing leverage and dealing with risk
It’s important to appreciate that spread bets employ leverage. This means that you only put up a small percentage of the overall contract value to control a larger exposure. Trading on leverage means that profits can mount quickly, but so can losses. It’s important to understand fully the nature of leverage to avoid getting carried away. For instance, as profits mount up traders can be tempted to take risks which they wouldn’t otherwise consider. Alternatively, they may panic if losses accumulate and then attempt to trade back into profitability by adding to a losing position. Consequently it is vitally important to try and take the emotion out of trading and the best way to do this is to follow a process with strict rules.
First off, never speculate with money you can’t afford to lose. Secondly, divide up your risk capital into smaller, discreet parcels. The more parcels you have, the more trades you can make. Some experienced traders would never risk more than 2% of their risk capital on a single trade. While that’s sensible, it’s also impractical if your risk capital is £1,000 or less. Even with a small minimum bet there’s not much you can do with £20 per trade. So it could be that you divide your £1,000 risk capital up into ten lots of £100. This will give you greater leeway on your individual trades, although fewer overall trading opportunities. This means you will have to choose your trades carefully, and keep you bets small to begin with.
The next step is choosing what to trade on. It may be that you follow a particular company’s stock price, or that you prefer to trade a basket of equities in an index. And of course there are commodities and currency pairs too. But before you trade anything it’s important to look at charts and understand concepts such as support and resistance. Also, teach yourself the difference between trending and ranging markets. It’s possible to make good profits in both situations, although they require different trading styles.
A ranging market is where the price of a financial instrument tends to fluctuate within a band. Often it’s possible to identify turning points where prices stop going up and head lower, or stop falling and head higher. Sometimes these turning points become established to such an extent that it’s possible to base a trade on them - selling the market when it turns down from resistance, or buying it when it turns up from support. All charting packages incorporate drawing tools and will enable you to put horizontal lines on your charts. You can match these up with markets tops and bottoms and this can often provide the basis for a trading idea - buying near support and selling near resistance. Of course, sometimes prices will break above resistance or below support and that it why it is vitally important to incorporate a stop loss on each and every trade. This ensures that should such a break occur, your potential loss is limited. This is vitally important when trading on leverage, and over a relatively short timescale.
A trending market is where, despite fluctuations, the overall price of a financial instrument can be seen to be moving in a particular direction. There’s only two ways a market can trend - upwards or downwards. But such trends may be short, medium or long-term, and it’s often the case that a shorter-term trend will establish itself within a longer-term trend.
It’s often said that the “trend is your friend” and there’s no better way of making money in spread betting than identifying and then trading in the same direction of the trend. This may sound easy but often it isn’t. For instance, if a trend is already established, it can be psychologically difficult to buy in when prices have already moved up substantially. Likewise, it isn’t easy to sell if prices have already fallen. But charts can help here, particularly if you can establish a trading channel. A trading channel is usually marked by two parallel lines running upwards (in a bull market) and downwards (in a bear market). The upper line will link a number of points (usually a minimum of three) where prices turned lower after rising. The lower line will link points where prices turned higher after falling. In this way you create an upper line of resistance and a lower line of support. Some traders look to trade between the two while others will look to buy and hold around the lower support line in an up-trend, adding to the position on pull-backs. In a down-trend, traders look to sell at resistance and add to the position if prices correct back to the upper line. Of course, as with ranging markets stop losses are essential.