Making A Good Income Spread Betting from a Small Pot?

Q:  Do you think you could turn a profit of £1500 net a month from a £2k pot?

Assuming a 6/12 month knowledge of markets and a reasonable initial investment of say circa £2k. Do you think you could turn a profit of £1500 net a month? Treating it as a full time occupation for say 6-7 hours a day. Mainly looking at commodities, precious metals and maybe a dabble with forex.

A: No. That's too little capital IMO. If you start to look at the math, then it's all about Risk : Reward and Win Ratios. If you are prepared to risk losing everything i.e. 100% of capital (or more), then the rewards can of course be in the 100's of per cent.

So let's do the math. I failed to resist. How lucky are you feeling? £2000 in the pot. Divide by 50. £40 risk per trade. £1/pip. Let's assume you are scalping. Scalp GBP/USD. Say you do an average 5 trades a day, Make average £40 per trade (taking into account the occasional loss). £4000 per month. In fact, you just need to start with £30 and be lucky.

In fact, month 2, £120/trade. £12000 profit.

Month 3, £360/trade. £36000 profit.

Month 4, £108000 profit.

Month 5, £324000 profit.

Month 6, £972000 profit.

Month 7, £2916000 profit.

This time next year, Rodders...

Just think for a minute what you are suggesting. You are suggesting that you can almost double your money EVERY MONTH. You are suggesting that with less than a year's training someone with £20k could earn £15k per month (just multiplying your numbers by 10). That is a gross income of c.£300k. Why on earth wouldn't the whole world be doing this wonderful work? Sure with spread betting you can lever up. Minimum deposits are typically 10% so your £2k could allow you to make an investment the same size as a £20k unlevered position.

Commodities and metals are far too volatile with that little on margin.

Commodities and metals are far too volatile with that little on margin. At £1 a point on crude or gas you can easily see swings of £400+ a day. Nice if you're winning, not so nice otherwise. You can make very good returns (a fortune!), but do be very wary about commodities, the volatility makes them seem attractive but it can be unpredictable and deadly, because some are relatively small markets they can also pay absolutely no attention to fundamentals for quite long periods.

Forex is similar but not so bad, and you can at least enter trades that offset e.g. long Euro/Yen short Euro/\$. However again the P&L is quite large.

You could start off with some shares that are related, say Xstrata, BHP, BP...etc. And trade those in smaller less volatile amounts whilst you get used to things.

I think you're asking for a large monthly gain though. Anything is possible in theory, though it pays to sit down and think it through calmly and logically. Can it be done? yes. If person x was to try doing it tomorrow would he do it? The 70% month in and out? Based on probabilities you would have to bet against him.

Generating annual returns of >15% consistently would make you one of the world's best fund managers. Buffett has done 20.3% from 1965-2009, has piled up a big fortune and is now widely regarded as a legend. He is the 3rd richest man in the world. If you really think you can earn return of 7.5% per month (£1,500 over your £2k levered 10x) without getting wiped out, then I strongly suggest you send your trading history and CV to Man Group, GLG Partners, Gartmore or Marshall Wace. They will pay you a lot more than £1,500 a month.

Anyone who trades futures will return 100's of % per year on capital used. It is worth noting here that Prop trading and fund managing are totally different worlds and a lot of people fail to grasp this. To make more of a distinction most traders deal with flow, they are executing orders for clients or executing orders that are part of a larger structure. Prop traders are relatively few in number. Although lots of desks that aren't supposed to prop trade do to an extent. Fund managers sit around all day having ultra long lunches in expensive restaurants talking about football with pension fund managers and insurance company treasurers ;).

Why not target £200 a month initially?

You could make a go of it with 2k if luck was on your side but you would probably lose it quicker. Learning to trade initially with pretend money might help. Why not target £200 a month initially? It's tax free and a good return. Don't feel you need to always be in the market, look for opportunities as they arise. And try not to volume/day trade, even though there's no commission on spread bets, the spreads themselves will eat into your capital quite quickly if you do. That's important, keep an eye on the bid/offer spreads they vary all the time.

Initially, forget taking any money at all as an income. Your two targets are preserving and if possible increasing your precious margin capital. Treat your margin as precious, don't give it away easily.

Look for things that genuinely look far too cheap or far too expensive, and research properly, not just the headline news but what is the market doing? Is the move you are seeing confirmed by volumes? A large upwards price move with low volumes is unlikely to be sustained, a move upwards with increasing volumes probably will be for example.

Don't just randomly punt, think carefully, and never trade in 'anger' after a small loss, chances are you'll just end up making a bigger loss.

Accept that often you will 'miss' opportunities and kick yourself, don't just move on to the next trade. Oh and beware the 'big' trade. If you think it could double your capital in one trade then chances are it could just as likely totally wipe you out. Think about the loss you could make, not just the profit.

Do it for the next month and come back and tell us how you got on. If you still have £2k in your account you have IMO done well.

Also, it will tend to come in lumps, looking for a regular income puts pressure on you to close out bets too early/often IMO.

Edited to add, one piece of advice, don't chase the market, let it come to you.

Having said that, £2k is a little too small to start as a full time career/job and don't expect to make money from the start or put any pressure on yourself to learn at the beginning. Ideally have another income stream. There is a saying you pay to learn and it is never so true as in trading. You will have big up days, down days and everything in between, but it is the big losers that teach you the most and if they don't teach you anything then you will be poor very quickly.

Seriously, though, there's a lot of sensible advice, although it may take longer than 6 months to get to a consistent level of profitability.

...Continues here - Becoming Rich : Becoming a Millionaire Spread Betting?

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