Perfecting your Strategy and Attitude

Welcome to section six of your Financial Spread Betting course. And today you'll see the importance of having the right mindset, and having a set strategy. It's crucial that you use a strategy you're sure of. Trade with a plan...and stick to it. Let's look at this in more detail.

You need the right strategy

The stock market, including spread betting, is full of rules that may sound good, but in many cases turn out to be rather less useful than they appear. Spread bets are a geared instrument. This exaggerates the gains and losses of movements, not only for those taking part in the underlying share market, but even more so for those betting on the share's next move. Of course, there may be some spread betters out there who have for the past two years been long of Marks & Spencer and simply rolled their position every six or nine months.

All this for getting out when the getting was good

But in actual fact there have been 10-20% pullbacks. One of the worst of these was between May and October 2002 when there was a decline from the 423p peak down to 293p, a new low for the year. The shares subsequently rebounded well and so bulls of the share were right to stay with it. But how did they know that the shares were not going to go down and stay down? After all, during the 1990s the shares fell from well over 500p.

The answer is that they probably did not, but they had the right trading strategy to cope if they were long or short. And this is the secret of being a good spread better: to have the answer whatever the market may throw at you. You may be banking on a trend continuing. However, more people lost money following the dead trend of the bull market in tech shares than lost out when the initial collapse came in March 2000. The added complication with spread betting is that because you are trading with a geared instrument, any move against you hurts and costs much more than trading in the actual underlying market.

The right attitude

The main attitude with successful spread betting is that you have to dare to think differently. Society rewards/punishes those who are much better or worse than the average, whether they are traders in business or in the arts. For example, to be a successful spread better you will have to be able to buy a share when all the brokers are still saying sell, to go short of a share when all the brokers are saying buy and to go long of a precious metal against the trend of a 20-year bear market. Sounds difficult? It is. But it remains a thrilling that's more than worthwhile.

By definition, in any market, whether it be shares or the housing market, most people buy at the top and sell at the top. When there are no more buyers left, a market falls and when there are no more sellers, it falls also. Unless you have something special up your sleeve you will not be able to break the mould. So to be successful, trading has to become a state of civil war against your fellow trader, someone who both thinks and does exactly what you do. Spread betting is in some ways about chasing your shadow and catching up with it. Much of the problem is that we trade with our emotions rather than with our brains. This is why I am in favour of a mechanical way of trading, one based on support and resistance levels, previous highs and lows - these tools in some ways allow the market to tell you where it is going, instead of you having to shoot from the hip.

Four winning strategies

There are a few different trading strategies that regular spread betters use to the best effect. If you've finished reading and understanding the fundamentals of spread betting, have fine-tuned your attitude, and are ready to move on to the next step, then read away -:

  1. Some spread betters choose to bet often and take small profits. The hope is that all of the winnings combined will make for reasonable returns. The key to this type of betting is to have tight stop levels. This is a risky spread betting strategy, because one loss can wipe out five or six winning trades. The spread itself also puts you at a disadvantage, because the position will have to move the distance of the spread before you can take profits. Discipline is the key to this type of trading.
  2. There are some spread betters who only trade in the quarterly contracts. This is the case with both Spread Trader and Swing Trader, two trading services that come under the Fleet Street Publications umbrella, that both use spread betting to maximise gains. They are generally working with predetermined levels at which they are willing to buy and sell. If a position and level are chosen correctly, then there is a large upside to this type of trade, as the market could potentially move in your favour for days. Choosing a level to close the position is important, because overnight risk becomes a factor. For example, a money-making position can be reduced to a loss if there are overnight factors that can influence the markets. Choose larger stop loss levels for these types of trades, as picking the exact level at which to buy or sell a long-term contract might prove difficult. If you are willing to risk having the market move against you in the short term, it can mean long-term gains - providing your view is correct.
  3. Hedging a portfolio is another spread betting strategy. If you have a shares portfolio that is made up mainly of shares from one index or similarly performing indices, and you expect short-term losses on it, you can use a spread betting firm to hedge this position. The way this would be done would be to sell an equivalent amount of the index and thereby make money as the market goes down, while being able to comfortably retain your portfolio. Once you feel that a recovery is approaching, you can then decide to buy out of your spread bet position as you see fit. This is a simple, commission-free way to hedge.
  4. Traders also use the strategy of buying or selling one market against another. Some traders believe that certain markets generally move in the same way and react to the same stimuli. This strategy works on the trader's belief that one market may outperform another at a given moment. For example, if the Dow Jones has made a 200-point upward move in one day and the S&P 500 has only moved 80 points, some traders would buy the S&P while selling the Dow Jones. The hope is that as the underperforming market corrects itself, the difference in the two markets will close.

Get the right timeframe

Intra-day bets are what most of us want to make money on. Unfortunately, this is the most crowded arena of all. The truth of the markets is that it is short-term traders who generally pay for the profits of the long-term players. Therefore, if you still want to try and win on a short-term basis, you should think long and hard whether you want to be a day trader. In fact, the best market moves are swings over two or three days. British Airways may rise from 130p to 150p, the FTSE 100 may fall from 4300 to 4000 or gold from $410 to $395 per ounce. The trick is not only to identify the setup patterns for such situations. However, the problem is that those with a day job may not be able to keep an eye out for such patterns.

You can exploit the way that daily bets start on the close of the previous day in order to enter a position once you know the closing level of the day.

Technically, the closing price of the day is the most important, because it is the final result of the day's battle between buyers and sellers. A closing price at or near the low or high of the day should have enough follow-through momentum the following day to at least give you a decent enough move to exploit.

If you have decided that the UK market is going to move significantly in the next few hours, there is little point taking a bet on a futures market where it will expire in six months. For this, a spread bet that will expire at the end of the day is ideal, especially given that the shorter the timeframe, the tighter the spread and the cheaper it is.

Use Watchlists and Alerts

Active traders like to keep track of markets that interest them and then wait for a potential setup to materialise to open a trade. The easiest and simplest way to monitor these sorts of opportunities is to create a watchlist so as to be able to track the performance of particular markets. Most spread trading platforms offer their clients the ability to create watchlists so as to check the latest prices for each of the markets they are interested and it makes perfect sense to make the most of these facilities. Watchlists are especially powerful when they are used in conjunction with alerts, the last of which can be utilised to provide automatic notification by email or sms message when a market meets certain criteria.

Next time

Are you ready to think differently? And go against the grain? If so, you ready to learn how to choose the right stock, or index, that will make you gains. And there are two ways of doing this: through fundamental analysis and technical analysis. In the following two courses, we'll be taking a look at both of these - and how to use them. See you then.

>> Next Page - What fundamental analysis can do for you

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