Spread Betting the Financial Markets

Spread betting is a popular online trading method. It can be used to trade just about any market and traders can either go long or short (buy or sell) their chosen stock, commodity, future or currency. Traders place a stake to bet on which way the market will move in either direction. The stake is placed per point and points relate to specified price segments (per hundredth, or thousandth, of a penny, for example) determined by the broker.

Brokers usually make their money on the spread, or difference, between their buy and sell price, so don’t have an interest in whether the bettor, or trader, wins or loses. Brokers may bet on some of the opposing positions, however, for increased profit margins. Because spread betting is classed as gambling, profits are sometimes tax free. It depends on which country a trader resides in and on the current tax rules there. These factors, along with the flexibility of spread betting and the ability to start investing with smaller amounts of money than with traditional stocks and shares trading, makes spread betting a good choice for some people.

Before trading, spread bettors need to learn how to trade or they are very unlikely to make money. Even then, most traders fail in the long term and virtually all lose money within the first year.

One of the first things to decide on is over which timescale you would like to trade. This will depend largely on the amount of time you have available, how involved you want to be on a daily basis and whether or not you enjoy making fast decisions. Some traders will place bets that last over the course of several days, or weeks, while others either day trade or scalp the market. Day traders close out bets before the end of each business day but may leave them open for several hours, while scalpers leave bets open for just very short periods of time – minutes usually, or even seconds. Bets lasting over longer durations generally have more staked per point than shorter term bets in order to make the profits worthwhile.

Whichever timescale you choose to trade over, you need to have some kind of strategy to give you an edge before trading online. Some traders use technical analysis or fundamental analysis to make buy and sell decisions, while others use a combination of both.

Technical analysis involves looking at trading charts and recognizing patterns in the representation of how price changes over time. It also looks at readings of technical indicators attached to trading charts. Analysis of patterns and indicators are thought to help predict upcoming changes in the direction of the market. It is best, if making a trading decision based on price patterns, to use at least one indicator reading to back up your decision, and vice versa, or to analyze at least two indicators, for example. Traders try to catch an upward or downward trend and ride as much of it as possible before it reverses in the opposite direction. They either try to catch a trend at the point of the reversal, or wait for a while until they feel that the new direction in trend has been confirmed, before placing their bet.

There is much free information online about typical chart patterns and there is no guarantee that any paid-for strategy is likely to be any more successful than ones discussed freely online. Again, many websites offer free advice on how to read technical indicators such as the MACD, Moving Averages and Bollinger Lines. Different traders have favorite patterns and indicators.

Fundamental analysis looks at what is happening currently in any particular overall sector, market news, trading sentiment (which is established by looking at what other traders are doing, or thinking of doing, through discussion groups, articles and online forums, for example). It also includes the study of things like individual company performance. Again, information about fundamental analysis can be found freely online.

It is always wise to practice any trading strategy on practice, or demonstration, accounts offered by most online brokers. You should read trading forums for advice on what has worked for other traders. Also read reviews and discussion groups before paying for any trading product or service, as many are just money-making scams.

Money management and trading psychology are important factors in whether a spread bettor is successful or not.

Money management techniques involve making sensible decisions about how much to place on each trade, for example. It is thought that traders shouldn’t place more than 2% of their total capital on any one trade. This helps them to avoid the risk of having all their funds wiped out and being unable to win them back. Also, traders usually make entry and exit decisions before they place a trade. They establish where they are going to place their stop-loss, which is a point at which they will want to exit a trade before they lose any more money on it. Most also predetermine where they will take the profit from a trade so that they don’t risk losing the money they have already made.

Trading psychology comes with practice and, even if a trader does well using a demo account, they may lose money when they go live because of psychological factors that come into play when they risk their own money. Often traders will let a losing trade run for too long as they become desperate to win back their losses. You need to be strong enough to cut your losses at a sensible point. Many traders also fall for the temptation of taking profits too quickly as they are unwilling to lose the small profit already made. Again, you need to have the nerve to let the trade run until it has made a worthwhile profit.

Bad trading strategies, money management or trading psychology are often reasons that traders lose money. Plain bad luck can be a large factor too. If you decide to try spread betting, you should never trade with capital that you cannot afford to lose. Always remember that you are involved in a high risk business.

Chart Representing Price Change with Japanese Candlesticks

Trading Chart
Credit: wikipedia.org