Your Spread Betting Strategy And Attitude

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 spread 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.

But in actual fact there have been 10-20% pullbacks. One of the worst of these was between May and October when there was a decline from the 423p peak down to 293p, a new low for the year in 2002. 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 spread betting strategy to cope if they were long or short. 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 spread betting with a geared instrument, any move against you hurts and costs much more than spread betting in the actual underlying market.

Keep it simple. Expose your equity only to the best opportunities the market has to offer, add to your winners and never hold losses. At the end of the day you should be able to write down your trading rules on the back of an envelope and give it to a 12 year old, and they’ll make money.

Winning Spread Betting Strategies

There are a few different spread betting strategies that regular spread traders 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 traders choose to spread 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 spread 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 spread betting.

2. There are some spread betters who only trade in the quarterly contracts. They’re generally working with predetermined levels at which they are willing to buy and sell. If a position and level are chosen correctly, there’s 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’re willing to risk the market moving 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. Spread traders also use the strategy of buying or selling one market against another. Some spread traders believe that certain markets generally move in the same way and react to the same stimuli. This strategy works on the spread 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 spread 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.

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