We'll call him John Trader. John is a 30-year-old analyst for a large international bank in the City of London. He has been spread-betting privately on sport, commodities and shares for seven years but, to protect the sensitivities of his employers, prefers to remain anonymous. I asked him about the highs and the lows of the spread-betting experience.
When did you start spread betting and what was it on?
I started out on sports. Just for fun, really. I knew that I didn't know enough about financials - about products and markets, commodities or currencies and what drove them.
I'd never even been into a betting shop. These are still are complete mystery to me.
To do it from the comfort of my own armchair was brilliant. And it's the same for financial stuff. Even though I worked in the City, if I wanted to invest or take a position on something, I knew I would have had to phone a commodities or share broker. I was worried about sounding like the complete novice that I actually was and being taken for a ride by someone. So I bet on what I understood. It was very small amounts to start with - the equivalent of putting a tenner on the Grand National.
Other than the convenience, what else drew you to spread betting?
I really liked the idea of the multiplier effect of spread betting - that over the course of a football game you could get more and more or less and less happy.
Can you remember any of your early bets?
One of the first bets I remember was on Nicolas Anelka to score the first goal in an Arsenal game - that shows when it must have been, about seven years ago now.
They had created an index of points for scoring - 50 points for the first goal, 25 for the second, 10 for the third. They quoted a spread for each player - 0 to 0.25 for the goalkeeper up to about 8- 11 for the strikers. I bought at 11 on a pound a point on Anelka and he scored first. It was a real buzz to win.
Was football the only sport you bet on back then?
No. I soon discovered that cricket was even better suited to spread betting than football. Individual and team runs are natural point systems. A game of cricket can fluctuate so many times over five days, and spread betting allows you to bet on each change of direction.
One of my best wins was on an England/West Indies Lords test match when Darren Gough was destroying the West Indies batting. I was watching the West Indies batsmen coming in and thinking 'they're just scared - they're really not going to last long'. So I checked the spreads on each batsman's expected number of runs. And each one was between 20 to 30 runs - not much under their test match average. I could see there was no way they were going to stay in that long: it was just dominoes - they were in and out. So I went short, spread betting that they'd make less than that and most of them made five runs or less. I made more than £200 with what seemed almost no stake at all.
Did that win spur you on to more bets?
It was that win that really sucked me in, I suppose. It's always the same thing - you have a big win and instead of doing what you did then, which is recognising a situation that is already happening, you end up going looking for the opportunities, and that's how it can so easily start going away from you.
It was the same situation in financials . I ended up going looking for the opportunity on the backside of a win. I made a lot of mistakes early on. You're so open to them when you're spread betting, mainly because you're not aware of the warning signs when things are about to go against you.
'I've found that a good way to cover myself is to build up positions slowly by making lots of smaller bets, putting the money on in increments rather than with one bet. That way you can take the profits or losses as you go'
So what sort of mistakes did you make?
One of the first was bottling it before the market went in the direction I wanted it to. Take cricket, for example. Let's say there's a spread on for a batsman to score between 40 and 45 runs. I don't agree he'll score that many, so I go short. The batsman starts playing OK and gets to 20 runs but is still batting. Of course the spread has moved on as the game has progressed - now it's on 60-70 for him because it looks as if he's doing well. I agree and think I'm going to lose here, so I think 'I'll take the smaller loss now rather than the bigger one later'. But if I want to get out of the bet, I have to buy at 70, making a loss of £30 (70 minus 40). So in effect, you pay the spread twice if you cancel it.
Of course, if the batsman then gets out the next ball, his total is only 20 and I would have won £20 (40 minus 20). So in fact there is a potential swing of £50 for me on the next ball. Cancelling like that has cost me a lot of money - taking the loss and having to pay the spread again.
How can you stop that happening?
The way to do it, I've discovered by experience, is to put limit orders on and then just leave them there. And even if I'm tempted, I try not to jump in.
Do you use stop-loss orders?
Yes, of course - but they have got me in trouble as well. I started by putting my stop-loss orders outside what I saw was the normal trading range for the commodity I was betting on. To use the Coca Cola share price as an example, if the spread was $43.00 to $43.25, I would put the stop losses at $5 above and below the spread. But I soon worked out that as there was about a 50% chance of winning or losing, on average I would end up losing because I would always lose the spread in the middle. I need to skew it in my favour, so I bring in my stop losses to $2 below and $4 above.
And then I get caught. Because now I'm inside the trading range, I end up falling on the wrong side of a J-curve. The price falls beyond my lower stop loss and then shoots up almost immediately. But my stop loss has closed my bet for me on the downside in the process. I had predicted the price would go up and I was right, but I end up losing.
Psychologically, putting tighter stop losses is a dangerous thing too. Because a tighter stop loss means you are open to less risk, that leaves you more credit to use either to make other bets or to increase your exposure per point on the bet itself.
And that's the real temptation. I was frustrated by being caught on the wrong side of the J-curve, so I tried to make up for it by putting on a larger bet with an even tighter stop loss. And I was caught again and again. It's a vicious circle. It's hard not to go chasing that loss.
Do you go for long-term or short-term bets?
Both really, but mainly short-term now because that's how the markets work. Longer-term bets tend to follow a trend but they oscillate within that trend. And even though I understood the fundamentals of the market, I was continually caught because I didn't understand the short-term oscillations. That's true of every market I've tried - they never move in the linear fashion you would expect.
How important is research for you?
I don't think most people in the markets actually do that much research, because the short-term factors are so influential. Most trading is done on short-term triggers, so when you're spread betting it's almost more important to understand how the short-term stuff works.
You've got to accept that in most markets the majority of the people who are in it are in it for the short term. You have to understand their mentality.
What do you spread bet on now?
Nowadays I only really spread bet on currencies and commodities such as gold, silver, the dollar and the dollar/sterling markets. That's because the movements in these are ruled by short-term factors, because the information about those factors is also very public. That means the reasons for the movements are easier to predict. They are also very liquid, so you don't tend to get the spikes.
How often do you spread bet?
The most I've bet in a day is 20 to 30 times on these kinds of markets. I've found that a good way to cover myself is to build up positions slowly by making lots of smaller bets, putting the money on in increments rather than with one bet. That way you can take the profits or losses as you go, staying in control.
Where have you made your biggest gains and losses?
My biggest gains have been on commodities and my biggest losses on share prices and sport.
My biggest gain was just last week. It was on the dollar/sterling index. Sterling started weakening very quickly with news of the weakening British economy and potential interest rate cuts. The price went from 187 to 182 in just five days. A point on that index is a hundredth of that.
I knew that because this was a short-term market, the loss would overshoot reality - the price would go down further than it should and then readjust. So I waited until the price started moving, went short at 186.00 when the spread was 186.00-186.05, and got out at 183.05, nearly 300 points down. The price went down to 182 but I wasn't bothered - I had £4 or £5 a point on that, so you can work out how much I made.
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