Making a Living from Spread Betting and Trading

Q. Is it possible to make a living from spread betting/trading?


A: You can but it takes time to acquire the knowledge. First pitfall is being seduced by penny shares which promise huge percentage rises. Next one is being attracted to quick win 'Day Trading' systems.etc perhaps trading. Sure you can get lucky e.g. KMR, but projects can easily get delayed and before you know it 12 months have passed and you're still waiting, e.g. Minco! Today I mostly trade wider trends using highly liquid, large cap stocks which are traded 1000's of times a day by the banks, funds.etc. It's a case of 'buy high and sell higher' and of course 'the trend is your friend'. Never buy a share just because it is cheap - it can get a lot cheaper! Same for a rising price - no such thing as it can't go higher. Of course penny shares will always have a place, say in 10% of a portfolio. But they should be the exception NOT the rule. As long as you cut your losses short and let your profits run, you will make money. However you need to apply a strict stop loss, say 7% - 9% from your entry point. And you leave it with your broker so it will be executed automatically and without you being able to change your mind. Turn off your monitor and stop looking at live prices. That's what I've learnt! Even if you are wrong 7 times out of 10 (or more) on your stock picking, as long as you apply the above discipline you will make money. I prefer to let my profits run, the reason being you need to cover costs, i.e. the other losing trades!

Do not try not to average down or add to a losing share. Keep it running of course assuming that your stop loss has not yet been hit. And rather, try and add to winning positions, those that are really going up. The reason behind this is that the smart money will be doing the same.

Also, you can increase your chances of success by trading with say, 'sector rotation'. The big money moves in and out of sectors. You just need to be aware and take advantage. Recently money came come out of energy and in to the more defensive stocks e.g. banks. It's one of the reasons why the Dow has taken off of late, money was rotating in there from smaller caps after the market recently decided to re-asses risk, figuring while these companies may not double overnight, neither will they halve.

A simple moving average trend following system will never get you in at the bottom since these systems never buy a falling share price. Nor will they get your out at the top. The aim is to grab the chunk in the middle. But you will have the vast majority of the market's money trading in your direction and moves up can be swif.

Just respect the leverage and obey your rules and over time you will make money.

Q. What kind of capital would you need to make a living at this, say £2k a month?

A year ago I used a £1000 to play around with on SpreadCo, I've done pretty well and it has started me wondering what kind of capital you would need to make a living at this, say £2k a month.

A: Different strokes for different folks really. It really depends how active, what trading time frame you use, average length of trades, percentage capital at risk...etc.

Perhaps it would be helpful if you did the sums backwards? In other words, how many points do you need to make in a year; from that you can see how big your stakes need to be and how much money you would need to survive a losing streak.

For those thinking of doing it, a backup fund is needed for security and to take some of the stress away. Also, a part-time job (hours - non trading times) would be sensible. Think of it as you would any business. You need a business plan, finance to see you through the first 6-12 months. Taking your profits out at the end of each month will not work. It needs a structured approach. Ideally you'd only want to be taking half or less of your income out of the account so that it can still grow constantly. Taking exactly what you make out and keeping the account the same size isn't going to work, because as soon as you hit losing streaks your account is going to start shrinking rapidly.

There is no such thing as easy money. In reality all profits are a factor of work, be it risk or actual labour. If you are just starting out bet very small and measure the results. Betting with real money however small is different from doing it on paper. However, if you bet too big, random market swings will blow you out of the game. This is called 'gamblers ruin'. If you bet too big you will always lose even if you are generally right. Spread bet are leveraged but you should avoid using too much of this leverage on any one single bet.

Warning: It is difficult to make a living from day trading - findings show that 80% lose money on spread betting. You have to be very disciplined and if you are day trading it is very easy to end up in a situation where you make money one day only to give it back the day after. I don't do it for a living, and don't think I could handle the added pressure of having to make a certain amount every week. That said, I have been trading for many years and been doing ok, one thing is that for sure you would need to put more than £2,000 in Ayondo if you want to take matters seriously!

Look at it another way though. Say you start with 20k while you have a full time job, and you manage to grow the account by 30% a year every year. After 7 years or so you'll have over 100k if you don't touch the profits. Then, you could consider leaving the full-time job being much more experienced and able to trade.

Q.:  I don't see spreads as the path to a massive change in one's financial status...

Gosh. My plan was to take 2 years to learn trading and see if I really liked it.
During these 2 years, I was to help myself and indulge as much as I could if I made a good day!
I still have fond memories of this night of partying
Actually, I might change it to "help myself when I make a good week"
So for 2 years, I am to focus on learning the skills.
Then, after these 2 years, load £100k in my account and go for higher strikes (£100-1000).
Thursday, I got it so wrong that I thought I was going to have a heart attack!
It was a strange coincidence that this happened when I was in the hospital visiting someone!
I made many mistakes:

Error 1. As the week started well, my overconfidence took over, so I increased my strikes!
Error 2. Having been following oil and $, I was thus convinced that oil could only go up, $ down. Maybe true long term, but not necessarily true for an intra-day position.
Error 3. As the price range of oil had been large, I used very large stops!
Error 4. I obviously generalised Error3 for $.

So I put my trade in the morning...went to the hospital...
After some time, asked for any computer room...
When I watched the screen, it felt like my blood had stopped flowing.
I simply couldn't believe my eyes : oil price was so cheap and falling as if 10000 new oil fields were in full production... $ was in a full bullish mode as if people were selling everything to buy $.
I was - how can I describe it - like a zombie.
I left the computer, went out of the room and the next door had " EMERGENCY : cardiac service" sign!
Awful coincidence. I just left the hospital without even saying goodbye.

So I didn't close my position - too painful to take such a loss!
And didn't check any of my accounts till this morning.
$ plunged and hit the VERY large stop losses! So I lost around 300 pips!
Oil has recovered. I am now looking to see how high it can go, and if it can compensate for the 300 pips.
So total so far : 160-300 = -140 pips!
I guess I am going to get back to good habits...
and I need to find a way to handle myself when I am feeling super-confident.

A: My father used to train race horses. I would go to the track in the mornings with him and this 'the one that got away' sort of talk brings back memories. Every gambler has a story and a strategy. I always wondered where they got the money to stake with.

I'm just here to explain a little about how the business works. That said, your emotive tone causes me concern. Sound investing is founded on detachment and a sober view of things. You are already talking like you need to chase your losses come hell or high water. Please do be careful, I know a lot of people who would love to take that 100K off of you.

You put up these arbitrary goalposts, e.g., 'two years then I'll be expert and play the big bucks'. Why two years? I worked with traders for two years and they better understood how to interpret what was happening in the market, but I never got a sense that they suddenly became great visionaries.

You seem like a nice person but looking for an angle - in your case spread betting strategies. There is quite plenty of material on this site and the Internet on strategies which you can peruse, but I do know what causes me concern. To me it's not much different and setting you up to be preyed upon like Inside Track. For instance, I happened to read a hilarious forum post on a crashing house price forum about some woman in Surrey who bought all these buy-to-let places in the usual dumps like mini-England in Spain and Orlando (the latter being the white trash capital of the world IMHO btw). It was apparant from reading about the place in Spain that she bought it sight unseen. Can you imagine buying a home without ever even looking at it in person!?!?! Shocking, sad and laughable. The point is that the woman assumed buying a house = make money. Perhaps you are assuming that 2 years spread betting every day = make money?

I can only say that prudence and a good education has kept me debt free and allowed me to live my dreams of living in Europe. You need to define happiness for yourself first at the outset before you proceed. Reading your e-mail, I am concerned that happiness for you is the thrill of a gambler.

Q. Do you really need to have a residual income stream or can you make a living using your capital?

I'm aware that you have additional income streams and I was wondering if this is something you consider to be essential to establish before being in a position to trade full time. I assume eventually if trading is successful enough it may be possible to live off the profits. I have read some of the books on this subject but haven't established any additional income sources as yet.

I know that this is all about individual circumstances, I suppose my question in a nutshell is do you recommend using proceeds of trading to live off or is it best to keep it all within the portfolio?

A: A very interesting question indeed... here is my honest opinion. Unless you have extremely large capital I personally think it is very hard to make enough income from just trading. Let's say you can make 20% after all costs a year which would be good going. You'd need £300,000 to make £60,000. And of course if you take the money you aren't increasing capital

But what I think is that if I needed to live off my trading completely I would be a much worse trader. Why? Because of the pressure of having to make money all the time. To suddenly rely on trading to replace your income can surely not be void of emotion. Add to this the volatility of day trading and that's why it can be so dangerous. What happens if you start to approach your deadline and realise you haven't reached your targets but at the same time you are desperate to not have to go back to a job you hate? Will risks and mistakes start to escalate?

I do have in fact a residual stream of income but without that income I am pretty sure I would be less likely to take losses fast and more likely to snatch profits too quickly. I think it is really hard just to make money from trading and because you never know what's round the corner (say a terrorist event knocks 20% off your capital) I would always expect to have other income streams. It personally makes me feel more secure.. and therefore makes me a much more relaxed trader... and so makes me more money!

My feeling is a good market player could make about 20% a year. Of course some are a lot better. I think trading for income is much harder than trading "rainy day" money which is my case.

Having said all that I think that at the end of the day everyone has a different goal, situation and responsibilities so all you can do is take on board the wise words and make up your own mind how you are going to play the game and use the knowledge gained.

Hope all that makes some kind of sense.

Practice per se doesn't make perfect, it is Perfect Practice that makes Perfect. You can't just 'practice' something for 10 years and think you will get to the top. You have to have very deliberative practice with constant feedback and reviewing. Most punters never truly review the markets or their trading and spend 10 years repeating the same 'practice'.

 ...Continues here - Why do so many Spread Bettors Lose Money?

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