A: Is spread betting for you? If you've only just started to look into spread betting then the answer is most likely yes. Do I want the opportunity to make an uncapped amount of money doing something I'm both interested in and enjoy? Erm...yes! If only it was that simple.
Without understanding the basics of what's needed to be consistently successful at spread betting you could risk losing a substantial amount of money, and a whole lot more than you may think.
So here's a quick look at the basic considerations. We'll take a look at each in more detail in future articles but for now this is more of a brief overview to get you thinking.
First and foremost, only use money that you’re willing to lose. “Willing to lose” may sound like a pessimistic way to approach things but it’s meant to ensure that you only use money that you don’t rely on to actually live.
It's not a coincidence that almost every spread betting site harps on about the potential financial ramifications. It's something that really should be taken seriously. With the unique way that spread betting is leveraged you could stand lose a lot more than your original investment. Obviously this is where measures such as stop losses and the correct approach to money management and stake sizes come in, but you'll be surprised at how many horror stories are out there where people just plough into things without any real thought given to the potential consequences should positions turn against them.
Are you actually able to commit enough time to do things properly and have the discipline to stick to what needs to be done. Being totally honest, to start with I wasn’t exactly the model student when it comes to this, mainly due to having the attention span of a goldfish. Sadly there’s no quick fix, and if there is then please feel free to share with the class. For me it was a case of putting a couple of processes in place to make spread betting part of my day-to-day routine, and then sticking to them long enough so they naturally became what I did without having to force myself. I'm definitely not one for sitting in front of my laptop for hours on end looking at charts (hence why the part time approach suits me so well), but I do know exactly what needs to be done for my particular style of trading. Make sure you do too.
When it comes to looking at what resource you need to consider it ranges from basic and essential things such as having access to the markets at key times throughout the day, whether that's on a PC or through your smart phone, to what trading software you should use in order to analyse the markets to find potential trades. My only advice here would be to firstly understand what’s required for system/ trading style and then work backwards, rather than splashing out on subscriptions to expensive software packages that may not even be necessary. Excitement seems to stifle common sense from time to time.
Knowledge is one thing, understanding how to apply that knowledge is another. Knowing what technical indicators, trigger points, entry and exist points etc are is one things, but actually understanding how they can fit within your system or specific approach to trading is something else entirely. This is more important than you may think, especially if like myself you heavily rely on technical analysis, for example certain indicators can give you conflicting messages which could lead you to enter a position only to see it go the opposite way.
Successes are obviously great, but unless you actually understand why a particular position went the way you wanted it to how will you ever be able to replicate it. This is where you approach things like a business. Every 3 months I review my trades and try to get a greater understanding of why things went the way they did. Did I lose out on a position simply because of some serious volatility within the market that day, or was it something to do with that particular stock? If you can’t answer these simple questions then you’ve got no basis on which to make future decisions.
The devil is in the detail. Again, this obviously isn’t an in-depth look into each area but should hopefully provide a little food for thought.
A: While spread betting is quite simple to understand it may not suit everyone's needs. Spread betting is not particularly suitable for investors with longer investment horizons (i.e. buy and hold investors) as the commissions for rolling future positions can add up with time. It is also worth noting that any form of margin trading (leveraged trading) carries a high level of risk to your capital although this doesn't mean that this form of trading has to be exclusive to high-flying city professionals.
If you are interested in frequent trading for short-term profits, or to deal in new markets like commodities and forex currency pairs, or taking advantage of falling prices, then financial spread betting could be for you. Just keep in mind that it is quite simple to lose more than your initial margin deposit if you don't utilise stops and the market you are trading does not behave in the way you expect!
RIGHT FOR YOU IF:
- you are able to tolerate risk.
- you have sufficient free capital which you are willing to put at risk in order to make potential gains.
- you have an active interest and understanding of the stock markets.
WRONG FOR YOU IF:
- you are risk averse and don't feel comfortable taking financial risks.
- your financial security would be affected by any losses incurred.
Also, spread trading requires a cool hand and the ability to remain detached and unemotional even when the market moves against you so quickly that you suffer a major loss in the blink of an eye... Trading is about mindset and many people tend to forget this. Don't trade when stressed or in desperate need of making profit - trust me it won't work.
You have to be analytical, disciplined and BOLD to make money doing this. You also have to be confident and know why you're doing what you're doing.
Remember also that throughout life most of us associate excitement as a good feeling to have but if you apply this to trading it can only lead to disaster. For example people tend to mistake fast moving markets for profitable ones however the fact is that most often than not if a trade is already moving it is too late - newbie traders tend to jump in on these moves only for the market to reverse and almost immediately run into a loss. The answer is to look for potential trades that are close to breaking out and enter for a low risk high reward entry following an initial pull back.
| Expectation... | Reality... |
| Spreadbets are easy to trade and don't need a lot of effort. | Spreadbets need to be regularly monitored. |
| Spreadbets generate high returns. | People who trade spreadbets often suffer trading losses. Large returns on individual trades are often counterbalanced by losses on others. |
| Trading spreadbets is similar to online share trading. | Yes, but the nature and risks of trading spreadbets are quite different. |
The positive aspect is that the skills required to succeed (mainly discipline, money management and the ability to follow a trading plan) can be learnt over time - you do not need to be a quant or professional day trader to be a successful spread bettor. This is not to say that you won't have down days; all traders will at some point encounter setbacks (that's part of life) but it is what you do afterwards that makes the difference (pulling yourself back up and learning from one's own mistakes, trading using a strategy...etc).
P.S. Make sure to sort out your self-discipline!!
P.P.S. Trading is not fun. It's actually pretty boring. Do extreme sports for fun. Trade for a living.
Can anyone make a good spread better if they worked hard enough and studied the stocks? Not, according to Simon Cawkwell - 'Many are too cowardly to have courage in their convictions and stick out positions over the long term' says Simon Cawkwell aka as Evil Knievel - the City's most famous contrarian. Others get unnerved by initial losses and lack the tenacity to keep trying. 'Many private investors have been burned to the point of never coming back'. 'It does attract the kind of people who are used to and enjoy taking risks.'
A: The broad appeal of the trading product is the same for everyone - irrespective of how much money they have to place. Which type of person is likely to spread trade? There's no common element that I could identify says Matthew Twomey an industry commentator. It appeals to young and old, rich and poor - it's just one of those products really. However broadly speaking you have distinct types of clients -:
- the thrill seekers (the ones who want to have some fun - rather than go watch the races they prefer 'playing' the stock market).
- the speculators who are looking to make short-term gains.
- investors who want to use spread betting as a hedge to their shares portfolio or to protect the value of some other asset.
Generally speaking these clients fall into two segments. There are the day traders who thrive on volatility and want to trade financial assets that tend to move up and down sharply, like foreign exchange. In the second it's those speculators and investors trading traditional stock markets and shares. However, as Andrew Edwards, who is the CEO of ETX Capital notes - although there is probably an element of pastime about it most spread traders are doing it to make money. They are educated about risk and their attitude around trading is increasingly sophisticated.
'Whenever you talk to a group of our clients, it is very common to hear them say that spread betting is part of their overall investment strategy. They are actively trading, rather than holding stuff for the long term. Quite often, clients say they have allocated 15% of their investable wealth for short-term trading.' - David Jones, IG Index's chief market strategist
A: In the past one would have found a high concentration of City-based investors using spread betting but over the last few years things have changed and today the weightings are a lot different from the first couple of years. These days the majority of spread betters are not investors based in the City. David Jones, IG Index's chief market strategist in London noted that spread betting has become a much more mainstream activity today. In his words: 'It has become a middle-class pursuit.'.
Single mums, professionals, all walks of life, it's really hard to differentiate. Where you do see a difference is that those who are not involved in the market on a regular basis tend to overtrade far more than City professionals who are far more selective in their choice. David Jones notes that a typical client at IG Index is a well-paid professional or someone who runs their own business. 'An IT executive, perhaps, or a lawyer with an interest in stock markets and a desire to plot their own financial future.' 'Typically, a new client will be a man in his mid-30s,' says Howkins (most clients are male, it is true). 'That's the period in most people's life cycle when they have surplus cash to invest.'
We did more market research here: Who uses spreadbets and what markets are available?
Popular myth has it that financial spread betting tends to attract either high-rolling professional punters or City boy-racer types trading on a bit of insider information, and albeit Howkins, CEO of IG Index does not attempt to de-glamourise them, he does a pretty good job by talking about his clients utilising 'surplus risk capital as a tool within their investment portfolio' rather than calling them speculators taking a punt. In fact, today we have a growing number experienced private investors who are using financial spread betting as part of a balanced portfolio.
'Until recently most private investors would have seen fairly poor returns from pensions and investment products, such as ISAs, due to the stock market performance. For those traders and investors willing to apportion a part of their investments to a higher risk approach, spread betting has a lot of appeal' - David Jones, chief market strategist at IG Index.
A: That is a good question. Age is not a restriction. Also, people tend to think that you need to have a high IQ or some sort of above-average intelligence or be a financial mathematician but the fact is you probably only need basic mathematical skills.
I think there are only a couple of questions you need to ask yourself before you start playing the markets:
- Are you there to make money or just to muck around? Either is fine but just keep in mind that the former takes dedication.
- Am I a day trader/chartist/speculator (usually taking short positions) or an investor (usually taking longer positions, often without a view to selling)? Either is fine.
Knowing why you are in the markets might from losing money unnecessarily, although, I suppose you can put it down to 'experience' or 'entertainment'. But if you want fun, then hit your local casino. If you want a boring experience that can make you decent money, try trading.
Edit: And unless you risk something real you have no idea how you'll react under pressure. I am a great believer in actually trading whilst you are learning, as the quicker I made big losses that really hurt, the quicker I accepted that I had an awful lot to learn.
There is a misconception that day trading is all 'clickity click', with spread traders executing deal after deal after deal. But this can't be further from the truth. Trading successfully requires staying focused, disciplined and being unemotional in the face of adversity. You do need to be patient and to have tenacity and persistence. You do need to get in, spend some time everyday say spend forty-five minutes, getting on with it - five days a week ideally but this really depends on your trading timeframe. You also need discipline (so if you don't have it you need to develop it) because without it you will fail. Discipline is about the ability and willingness to consistently follow your trading system every single trade without exception - even if you feel like not trading today... Certainly you shouldn't overtrade and it is best to enter the market at a pre-determined level you have identified from the outset.
Who shouldn't spread bet? Anyone who doesn't have the time to follow the markets and monitor trades everyday especially if one is day trading. And no one should spread bet with his life savings - put aside some money as a starting pot and get on with it, but don't spread bet with your life savings (or even worse on credit!).
Please ensure you understand the risks as spread betting being a margin product is not suitable for everyone. If you are in any doubt as to the suitability of spread betting for your personal circumstances, you should seek independent financial advice.
Hollywood has often depicted traders as daring risk-takers like the phone-slamming, cigar-smoking, lunch-is-for-wimps hero Gordon Gekko in the movie 'Wall Street'. However, a more realistic character for a trader would be the straight guy in a cop movie. You know, the uptight spoilsport who is always instructing the hero to follow official guidelines and procedures, and warning about the danger of taking the law into one's own hands. This is because in practice professional traders are risk specialists, not gamblers who are able to work out and hedge their risks. Additionally they are aware their biggest enemy in the market is staring back at them in the mirror.
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