Fears, Aspirations and Getting Started

Taking on the Market

There is no magical formula for winning on spread betting. You have to find the way that works for you. Watch your market carefully before betting and at the beginning try and stick with very liquid stocks which have much tighter spreads. Know realistically what figure you want to get out at and stick to it. Several small profits are better than one large loss. There is no doubt you will sometimes lose money, but so long as you gain more than you lose, you are a winner. Always consider setting a stop loss to limit your losses and remove the emotion from your trading decisions. This is very important when trading short-term. Don't let your losses run but don't sell too soon either. As you are playing with leverage using stop losses is a must otherwise your losses could be substantial. Stop losses can only be disregarded when you have paid for your shares in full.

Selling too soon is something we all do from time to time. We all expect our shares to double within a week or two but sadly that rarely happens. The great thing about spread betting is that you can place bets that close 8 or 9 months away over which time large gains can be made. As long as you can get the initial timing right you should be laughing.

Patience probably is the key, the more patience you have, the more trades you will make and the more experience you will gain. More experience in theory at least means more winning trades. Those without patience should not be trading as it will force them into trades that they have not researched fully.

One major lesson I have learnt, is to make stop losses large enough to be viable. In the early days I lost through fear of gathering large losses in my spread trading and sold my losses far too early instead of watching and waiting for the market to turn. As I remember reading, the great Jesse Livermore said 'It was never my thinking that made the big money for me, it always was my sitting'. Patience is an essential virtue in equities, as long as you had the correct reasons for buying in the beginning of course! Never buy on a whim, but don't underestimate that gut feeling either on occasions. Opening too large a position is another pitfall which inexperienced traders sometimes fall into. This forces the stop be be too tight - spread betting GBP50 a point with a stop of 10 risks GBP500, as does betting GBP10 with a stop of 50, however the former position is much more likely to be stopped out whereas the latter offers a better chance to increase the number of winning trades.

There are some markets which cost more to bet on than others. Stock market indices, for example, start at around a couple points for the daily bets and go up to six, eight or more for the quarterly futures. As for company shares, the spread largely depends on the underlying liquidity. The spread will reflect what is happening in the underlying cash market. When the stock market is busy, the spreads will generally tighten, which in the UK tends to happen in the run up to the close at 4.30pm. The least liquid period is typically the first half an hour after the market opens.

Generally it is more expensive to bet when the underlying market is closed. For example, the quarterly FTSE 100 futures spread may increase from 8 points to 10 points after 4.30pm. Outside of normal market hours, a spread betting company acts more like a bookmaker, essentially making up the stock index futures prices based on what the US markets are doing and the business on their books. Those who trade at such times must inevitably take on board a certain level of risk.

It is also probably a good idea not to trade first thing in the morning. Spread trading firms widen the spread until they see which way the market is going. Best time to trade is mid-afternoon. For one thing in the morning spreads widen so you will be paying a higher price to buy and getting a lower price if you are selling (vice-versa if you are shorting). By mid-afternoon the spreads have narrowed, stocks that shot up in the morning have usually retraced as the market settles down.

Some of the big cap/mid caps FTSE companies can be traded to make a profit provided you can get your timing spot on, as I mentioned this is a skill in itself, and not for the faint hearted. Knowing the share well, i.e. having done your research, looking for weakness in shares prices helps a great deal. FTSE 100 companies are especially good for spread betting. The actual 'cash spread' (i.e. the spread on LSE) is tiny. Also, the spread betting firms impose a tiny spread on FTSE 100 stocks (as opposed to smaller cap stocks) as more and more investors are choosing these stocks and it's becoming a cut throat market. Lastly, since there is no stamp duty you only need a very small shift in share price to be in profit. FTSE 100 companies are very trendable (due to the high liquidity) and they are also great around announcements. Less liquid markets like small stocks will cost more and so require bigger moves if they are to produce a profit.

Most AIM stocks especially those that have been talked about on Bulletin Boards (BB) will be priced up accordingly, as the these are the next stocks that the sheep will follow, the secret is to research before hand and get in before a stock is tipped, as that`s when the spreads become stupid.

And remember a profit is a profit, when a stock rises 10% it doesn't matter if you invested £1000 or £100,000 you still make 10% on your investment, so everyone is happy. Also remember a paper profit is zilch until it has been realized .

Never risk more than you can afford to lose, one day you can be up, the next you might be running for the exit, this only comes with experience. It is worth noting that in the United Kingdom traders have an average of more winning trades than losing trades but they still makes losses because the losses incurred are bigger than the gains from their winners.

You might say, ok granted but isn't it still risky?

The simple answer is financial spread betting is risky mainly because you are trading on margin i.e. as you only have a small percentage of the total value of your trade on deposit means that your losses can accumulate to an amount greater than the initial deposit.

There are of course ways to reduce this risk -:

  1. Don't use leverage without fully understanding it. In fact you aren't forced to use the leverage and you can deposit in your account for the total value of your trades (i.e. forgoing the leverage benefit but retaining the other benefits).
  2. By considering the stake size that you have - is it too big? - if so why aren't you using a smaller stake size?
  3. Are you using closing orders - stop losses? If you start running your losses in the hopes that the markets are going to come back then you are more likely to join the losers' league.
  4. Understand the market you are trading and recognize the technical setups that create momentum/volatility.
  5. Trading the wrong timeframes - maybe by being too short-term, look further.
  6. Know the market that you are trading in particular the market information sheets which show you the trading hours of the underlying market itself and the spread company's market hours (which may be different if the spread betting company offers after-hours trading).

Setting Goals

How much money do you want to make from trading?

This is a key question every trader should ask. If I were to ask this question to you now you might reply either 'errrr, lots!!' or 'erm, I don't know' or perhaps you might say '£500 a month'. Problem is the first two replies lack direction while the third might not provide you with sufficient incitement to really succeed in trading.

This is because the human mind is hard wired not to take action if there is no direction or sufficient incentive to succeed. However, success demands action and perseverance. Generally the reason people don't know the answer to this question is because they haven't really spent any time thinking about how much money they need to achieve financial freedom. And the real reason for this is that people don't believe they can make that much monies so they try to avoid thinking about it to avert disappointment. People don't believe because they haven't ever made a consistent profitable income from trading. In the case of the third person who replied stating a goal of £500 a month, suppose this person has a work salary of £4000; given this he is unlikely to even achieve his modest goal of £500 profit a month since in his subconscious he doesn't really believe that it is important to achieve this goal (his goal should be to make at least the same amount as his salary).

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