Odds of Winning and Successful Spread Betters

Q. Is it possible to open and close bets on FTSE/Dow indices on a daily basis and be profitable?


A: I don't think trading the indices on a daily basis is important; it's whether you win overall that is decisive...

But, yes some people day-trade and are profitable although it is a real test of discipline. You are unlikely to come out on top without a strategy. The strategy will depend on how much time you want to spend in front of the screen and what your emotions are like with dealing with losses. Some strategies require you to lose most of your trades but when you win, it is big time and makes up for past losses. I can't handle that but some do. Other strategies are based on going with the breakout above or below a previous high or low. Even others are based on price action, trend and/or moving averages.

I know someone who only trades the first half hour of the FTSE and Dow open. Another chap I know trades the FTSE futures between 20:00 and 21:00. And another trader I have met has a 20 point check-list before he takes a trade and never loses more than £100 on a trade. Others trade the round numbers i.e. Dow 12000, FTSE 6000...etc

At the very least open a trading simulator account with a provider such as ETX Capital and bet for demo money for six months (or even better do it for real but with the tiniest allowable stakes). If you haven't got the discipline to do that, it's unlikely you will have the discipline to day trade. Try trading the first half hour on a one min chart. Can you turn the screen off and walk away - every day - no 'just one more trade'. I find the first hour the easiest but nothing works in all markets. Finding a mentor also helps, otherwise be prepared to lose quite a bit of monies...

I will reiterate that you need to have a strategy and you need to have a plan for each trade. Ignore that advice and you're just rolling the dice.

Q. Why is it so important to have tight spreads?

A: Some people don't calculate how much the spread affects their trading strategy. I believe this 'phenomenon' exists because most open small accounts and the spread doesn't 'hurt' when opening a position. But if anyone doubts the validity of the above statement then just do yourself a favour and open a demo account with, say, $100 000 and trade observing risk management and therefore position size. You may be quite surprised i.e. being 'down' by a few hundred dollars immediately when opening a position!!! Yes it's SUPPOSED to be 'all relative' but it's ONLY 'all relative' if you're factoring in the spread and / or commissions no matter HOW small your account is!!!

Q. But aren't the odds stacked against you?

I do understand that spread betting is very similar to cfd trading and that if you take the leverage away its very similar to shares trading.

However, the odds of gaining in the stock market are better than 50-50 if you invest in equity markets for the long term since they appreciate over time - taking that I have to pay the spread to the spread betting provider and that spread betting isn't efficient for holding a longer term position doesn't that pile the odds against me?

I mean:

Spread betting is the zero sum game as it is based on futures.
Futures and options are zero sum game as they are derivatives.
Derivatives are not making money.

A: Paying spread to a spread bet provider is just a different form of commission that you would have to pay to a stock or futures broker, it may cost more or less, but these must be compared on that front like-for-like for a fair comparison.

Spread betting may not be an efficient mechanism for holding some longer term positions. This can be down to the cost of leverage on non Future based bets. Stating that longer term trading 'will pile the odds against you', I would argue against. It may be true that the additional costs associated with the cost of maintaining leverage over an extended period of time are greater, but that is because your exposure to the market can/will be greater because of the leverage. If you bought £1000 worth of stock with a spread betting provider and £1000 worth of stock with a stock broker and held this for a couple of years, then it will undoubtedly cost more with the spread betting company, but if you used the £1000 as a deposit to leverage up (using 10% margin) then you would gain access to £10,000 worth of exposure. Therefore by trading with a spread betting provider you can either gain exposure to £1000 worth of stock for a £100 deposit, leaving you to do as you wish with the other £900, or you use the full £1000 to leverage up by 10 times to £10,000 worth of exposure and multiply your gains/losses. The ability that this has comes at the additional cost you are talking about. Ultimately though the overall total cost may be greater, but the net gain (if you gain) is greater also because you are simply paying a percentage of a greater amount of exposure that was speculated because of the leverage.

Not all spread bet products are based on Futures, the Rolling bets are based on the cash products not on Futures, e.g. the Rolling Vodafone bet. I personally do not consider these spread bet products to be subject to zero sum game characteristics.

Spread betting on futures based products may well be zero-sum-game as the derivatives markets are considered so. If this was a seriously negative connotation then there would be hardly any liquidity of trade flow on them. Consequently I would say the rising volumes of the previous years on derivative exchanges would prove this to the contrary. It should be noted that the derivatives markets are used for two primary reasons, speculation and hedging. The hedging mechanism is used to hedge underlying markets that are not zero-sum-gain, whereas the speculators are speculating against other speculators and the hedgers. Therefore although they are technically zero sum game products they are derivatives of products that are not.

Spread betting on futures is ultimately based on providing a mechanism for retail investors to speculate on moving prices in financial markets. I don't think anyone in the derivatives or spread bet industry would profess that their product is suitable for everyone, but it does provide a mechanism for the retail investor to participate in a tax free manner. Ultimately spread betting providers are just a vessel for clients to speculate on financial instrument price movements. They don't necessarily argue that speculating on these markets is suitable for everyone, simply that if you are the right sort of person then they offer a product that has some significant benefits.

 ...Continues here - Intelligent Ways of using a Spread Bet

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