A Step-by-Step Guide to making Successful Spread Betting Deals

Welcome to the next part of your Financial Spread Betting course. Before you can start trading, you need to set up a spread betting account. But which one to choose? Well, read on. You'll also see how to make use of a stop loss - an integral part of every trader's strategy. And then there's the benefit of a limit order. So let's get started.

Research companies

Give companies a call. All the good spread betting companies offer evening 'open houses', where you can find out what they have to offer. Attend these. Not only will you get a good sense of the company you will be dealing with, you might pick up some good spread betting tips. (We will discuss and evaluate the best spread betting companies in the UK in Section 9 of your spread betting course.)

Set up the right account

The process of setting up a spread betting account differs from company to company. Some spread betting firms require that you download a form from the company's website, or call and ask for an account application form. You simply fill it out and post it back. But less rigorous firms could set up an account for you in 10 minutes.

Due to FSA money laundering regulations, some spread betting firms require their applications to be accompanied by an original utility bill or bank statement, and a photocopy of photo identification, such as a passport or driving licence. The form will also ask you for financial details, including your income, the value of your savings and investments, and the equity you own in your home. This information gives the spread betting firm a good idea of how good a credit risk you are.

Once it receives the application, the company will contact you to run through the particulars of the account. These accounts can usually be up and running within 24 hours. Generally speaking, the industry offers three types of account.

Limited risk deposit account:

This account is generally the most suitable for beginners in financial markets, but that is not to suggest that many experienced investors will not appreciate its benefits. All trades on this account must include a controlled risk stop, so if a market or share falls to a level that you have specified, the trade will be closed. You need to have cleared funds in this account in order to trade. This type of account is probably essential if you intend to place big bets on daily movements.

Standard account:

With this account, you simply send a cheque or electronic payment to cover the account size in which you want to trade. You can trade in the manner of the limited risk account, but also have the flexibility to trade with non-guaranteed stops or no stop loss at all.

Credit account:

With this account, trades can be done on credit. As a result, you will not need to pay anything up front. It operates like a standard account, yet no deposits are required to hold the bet. If running losses exceed the given credit limit, then a margin call will be made. Before opening the account, you will be required to send evidence of your ability to pay losses, along with a demonstration of experience within financial markets.

Using your account

Once your account is open, you'll be given an account number and telephone and Internet contact information to use to place bets.

Making a bet properly

There are two ways to make a bet: over the telephone and online.

A spread betting company will give you a two-way quote, offering you the opportunity to 'buy' or 'sell' that market. You will specify how much in pounds, dollars or euros you wish to bet (the 'stake') per point movement in the market. For example, when dealing with equities, one point is equivalent to one penny.

The language of spread betting

"Hello, can I have a dealing quote for Vodafone Rolling Cash for a £10 a point bet please?"

(Do not at this point say whether you want to place an up bet or a down bet.)

The dealer will then quote a price, for example 98 - 99. This quote represents the bid-offer spread for Vodafone 'Rolling Cash'.

If you think Vodafone will weaken (or go down), after hearing the dealer's quote, if the price is acceptable, you would say: "sell £10 a point". The dealer will then confirm the trade to you: "At 98, you sell £10 per point Vodafone Rolling Cash."

It is important that you give your order immediately. Prices in the markets are changing all the time, and a price quotation has to be accepted or refused within seconds.

You may refuse the quote by saying: "nothing there".

In a fast-moving market, once the dealer has quoted a price, you may hear "out" or "change", which means that the price has changed and you can no longer deal at the original price. You may then request a new quote.

You must always wait for the dealer to confirm your trade and not assume that you have executed your trade on giving your instructions to buy or sell.

By instigating the trade in the above example, you now have an open position. You are now short a £10 bet of Vodafone at 98.

Once a bet is executed, no cancellation, adjustment or waiving of a bet is allowed.

To close this open position, simply follow the same procedure outlined above, this time placing an equal and opposite bet in the same way as previously opened. In the above example you would now need to instruct the dealer to buy £10 a point Rolling Cash bet on Vodafone to close your open position.

Or you can simply trade using the Internet.

In some ways, the business of trading on the Internet is rather simpler and more straightforward than trading on the telephone. Most spread betting companies' websites contain password-protected areas that account holders can access and trade through. Typically, once you log in you will be presented with lists of different markets sectioned off into individual areas such as shares, indices and commodities.

How a limit order can help

Using limit orders together with specific buy or sell levels is a good strategy. It is important to have an idea as to how much you can expect to gain on a specific position and close the order once that target has been reached. This stops the position turning into a loss-making trade. In volatile times, this strategy works especially well - as a money-making position can suddenly, within the space of minutes, be turned into a heavy loss-making trade.

Limit orders can also be used to close profitable positions. Once a trade has reached a good profit-taking level, a limit order can be placed to close the trade while you continue to run the position. For example, if you go long on the FTSE 100 at 4000 and the market hits 4100, you can set a limit sell at 4090, thereby guaranteeing 90 points' profit.

How to best use stop losses

Although financial spread betting is a margined product that provides you with a high level of gearing, you can't trade without capital, so the preservation of trading funds is of the utmost importance and this is where stop loss orders come in useful. A stop loss is an order which closes out your position at a certain price if the market starts moving against you. You can place a stop loss order when you open a trade and with most providers you will be able to adjust or cancel the stop loss as the market moves.

There are two main ways you can use stop losses:

  1. Choose a market level at which you would like your trade closed For example, you have a long order on the FTSE 100 open at 4100. You decide that if the market moves beyond a level of 4085 you want your position closed. Therefore, you choose a stop of 15 points.
  2. Decide how much money you are willing to lose if the position moves against you and choose your stop based on this. For example, you decide you are willing to lose £200 on a £1 position. You would pick a stop to suit that choice.

Where to place a stop? This is one of the most difficult decisions in trading. The simplest answer is that you should only take trades where the tightest stop loss possible can be placed logically. Ideally, a stop loss should be placed at a significant market level and not on an amount of loss you can afford to lose. You should use the market to indicate where to place a stop loss that will not be hit. If you are a fan of Vodafone and its multi-year low is 80p and it has successfully tested that level on more than one occasion, the odds are that going long at 95p with a stop loss at 75p is going to be a successful trade. It is then up to you whether you think that risking 20p is worth taking. It is not worth taking if the maximum upside you can see is 110p, but it is fine if the shares could make it up to 150p.

A stop loss strategy at work

Let's go back to 28 June 2001. Marconi is trading in the market at 251 - 252

  1. The September bet is 253 - 254.
  2. You decide to make a controlled risk up bet for £50 a point.
  3. The controlled risk spread is 5, so your opening level is 259 (254 + 5).
  4. You decide to place your guaranteed stop 30 points away, at 229.

Your total risk is £50 x 30 points = £1,500.

After a week of moving sideways at around 240p, Marconi is suddenly suspended on 4 July. The next morning Marconi opens at 126p. Despite the price falling to 126p, your bet is closed at your chosen stop level of 229. You are protected and your loss is restricted to £1,500.

Without the guaranteed stop, you would have been facing a loss of well over £6,000!

Running profits with stop losses

The best thing you can do with a stop loss is to allow it to enable you to run your profits. Once a position is on side, you want to make sure that it does not turn into a loser. Say you bought the FTSE 100 at 4100 with a stop loss at 4050 and the next day it is at 4190. Rather than closing out the position, why not give it a chance to make you more money? From 4050 raise the stop loss to 4130 so that you know that whatever happens you will be in profit. The following day the FTSE 100 rises to 4250 and you could raise the stop loss to 4220. If on the fourth day the market falls to 4220, you have made a decent profit going with the rise in the index, even though you have finally been stopped out.

Note: Some providers will also allow you to have a 'trailing' stop koss, so that you can protect your profit as the price moves.

>> Next Page - How to Protect your Spread Betting Winnings and Manage your Losses

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