New To Trading

Day Trading and Spread Betting

If you’re speculating on the markets, and you’re also looking for a method that offers a more extreme Risk/Reward ratio, definitely check out spread betting, and definitely read this article. I’m going to help you understand the ins and outs of this complex system, from platforms to trading strategies, this article will expand on everything you need to know to get started with spread betting and, hopefully, become a master of the art.

Spread Betting Brokers

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What Is Spread Betting?

First thing’s first; what is spread betting? Essentially, it’s a mechanism of trade that opens several different markets to the trader, and all through one broker. Check out the list below for examples of the markets you’ll have access to:

Instead of having ownership of a particular asset, like a unit of any type of bitcoin, spread betting is basically following the asset and speculating on the likelihood that the security price will increase or decrease. This speculation is constructed around the prices that are displayed by individual brokers.

This is looked on as a type of gambling in the United Kingdom. You can use that term if you like but, European aspersions aside, spread betting is fully regulated FCA.

Astute traders using this instrument will sharpen their skills and find ways to utilize its unique qualities to a degree that rivals traders working with more traditional means; like day-trading and futures and the like. 

How Does It Work?

Ok, compared to a CFD, which is essentially an agreement to trade the value of an asset when the contract was open, for its value when the contract was closed, spread betting is an actual trade on the future of the asset. And you actually trade as well, instead of just “betting” on the asset. After that, you hold your ground during fluctuations, and wait for the right moment.  

A “spread” is a just an educated guess, a prediction on the direction the market (and the value of your asset) will go over a given period of time. It is the “distance” or spread between the starting and ending values of an asset. The “betting” comes in when you, the trader, trades on the accuracy of that broker’s prediction.

In practice, and theoretically after you’ve done some homework (please research your bets carefully. As I mentioned, this market is highly volatile, offering a greater risk/reward ratio), you sell if you thin your broker is overshooting the future value, or buy if you think they’re prediction is too low. Simple as that.

Spread Betting Example

Ok, you sit down to look at what your broker is predicting for the day, and you see that they are speculating that Applied Graphene Materials, which started the day at 115p, will be at 116p by close of day. But you think that the share will close at a higher rate, so you buy $100 per point movement.

You put up the cash, and now you wait for the closing value. If AGM closes at 120p, that’s 4 points higher than the buy price of the firm; so you just made $400. Well done you. But, if the firm closes at 114p, which is two point lower than your buy price, you’ll end up losing $200. See what I mean?

Advantages of Spread Betting

A large number of people are funneling into the spread betting game every day, and for good reasons. I’ve listed some of those reasons below:

  • Tax-free – Everything you make, all your capital gains from spread betting in a day, are exempt from taxes. It’s true that speculating in this way may obligate you to significant taxes overall, spread betting itself is free from any and all tax, including capital gains and stamp duty. That is a huge draw for traders of all kinds.
  • Minimal capital required – If you’re trading with more traditional instruments, you’ll be obligated to put up far more capital for an outlay similar to the example I gave with AGM. Tens of thousands of dollars would be necessary to have access to the same exposure; this makes spread betting an attractive instrument.
  • Regulation – Highly regulated instruments like spread betting protect a trader form everything from scams and con-artists, to a whole host of other market related dangers.
  • Access – We all know that the more restrictive a tool is, or rather, the fewer options it gives you to structure your trading around your particular lifestyle, the harder it is develop consistency and skill in the market you’re looking at. Spread betting is highly flexible, giving you access to several markets such as equities, cryptocurrencies and interest rates. Not only this, you can also trade 24 hours a day with spread betting. And even though not all markets are available at all times, the ability to pick when you trade, unrestricted by your instrument, is a big draw for aggressive traders. 
  • Commission-free – If you’re the kind of guy that’s making several trades every day, a mechanism that incurs even a small commission is likely to dissuade you from considering it. Spread betting usually doesn’t include commissions on trades, instead including the cost in the spread itself.
  • Leverage – Quite a few brokers offer leveraged trading, and while this does allow you to increase your position size by borrowing capital, increasing the potential for gain, it also proportionally increases your risk of loss. So, take that with a grain of salt.
  • Arbitrage or Hedging – If you combine spreads, this may result in something called “arbing” which you should read about here. It’s short for arbitrage and it allows a trader to effectively hedge other derivative holdings to their advantage.

If you read what I’ve got coming up, and it sounds appealing to you, you may like the prospect of spread betting a s full time career choice.

  • You’re sick of limited asset class access, and you want more options.
  • You don’t want to pay tax on direct profits.
  • Instead of simply speculating on the rise of asset’s value, you want to be able to bet on decline as well.
  • You want to trade in Sterling, even if you’re interested in the wider international markets.
  • You want the benefits of trading frequently without suffering the commission rates.

Risks of Spread Betting

I’d be remiss if I didn’t give you the full picture here, which includes the “cons” of spread betting as well as the potential pros.

  • Loss potential – I probably don’t have to tell you that it’s a bad day when you lose more than your initial investment, and your getting calls from your broker because he wants his money. You must pay close attention to your risk and positions. In fact, brokers are required to publish and display openly their “risk of losing” percentages to avoid liability. 
  • Addiction – Remember how we mentioned that the EU essentially calls spread betting gambling? Well that criticism isn’t exactly unfounded. A trader can easily find him or herself in a situation where you are essentially just gambling, because they overtraded. It is literally the worst thing you can do to yourself as a full time or part time trader in this market.
  • Expensive bid-offer spreads – The best advice I can give you before getting started, other than encouraging you to do your homework, is to extensively research the brokers you’re looking at dealing with. Many brokers who offer non-commission trades compensate that loss by bid-offer spreads, or bid-ask spreads. This can sneak up you pretty quick if you haven’t looked into it carefully enough.
  • Legality – It is absolutely illegal in the United States and Japan, but not in Britain or Canada. Find out if it’s legal where you live before getting started.

Before you get lost in the intoxicating potential of spread betting, with gleaming eyes and dreams of yachts, you should make an effort to understand the risks involved. Th best traders are the diligent, realistic investors.

Spread Betting vs Share Trading

Some people rightly question why you’d opt for spread betting over the more traditional share trading. With share dealing, you purchase a physical number of a company’s shares, e.g. Apple, and sell them in the hope they have increased in value to make a profit.

However, you can only turn a profit if the share price increases.

With spread betting, you can enter positions on any price movement on a company’s shares. You can place a spread bet trade on a plummeting share price.

This is known as ‘going short’, or simply a ‘short’ . With traditional share dealing, you simply do not have this option.

Also, you do not own the actual shares with spread betting (they are a derivative). This means it often requires far less capital.

This makes spread betting ideal for beginners and those with limited capital. So, if you’re considering spread betting vs stock broking, binary options, futures trading, or long-term investing, you’ll often find the former is often an attractive proposition.

I’ve assembled a glossary for you to familiarize yourself with the terminology. Education is where you’ll find an edge over the competition.

  • Bet size – The bet size is the calculation of how much you can lose or gain on the point movements in the market you’re looking at.
  • Spread/Bid/Offer spread – This the literal range (125p to 130p) over which the firm is predicted to shift in a given trading day.
  • Controlled risk bet – Typically, you should expect to pay some premium for this kind of bet, but it essentially protects you from incurring a greater loss from a downturn in the market caused by some major event that ripples through the trading world. This gives you what’s called a guaranteed stop.
  • Down bet – This is one of the best functions of spread betting compared to other instruments. It allows you to bet on the likelihood that an asset will decline in value, and make gains on that speculation by placing a sell bet at the bid price.
  • Up bet – This should be obvious. In contrast to Down Betting, Up Betting is betting on the likelihood that an asset will increase  in value.
  • Expiration – This is the time when all bets close, and when your bets expire they are settled at the closing price.
  • NMS (Normal Market Size) – More frequently referred to as Exchange Market Size, this term represents the exchange-specified quantity of shares that a spread betting market maker is compelled to quote a two on, in a certain underlying market.
  • Slippage – This refers to the difference between where the actual computer updating the trades signaled the entry and exit for a trade and where the clients themselves entered and exited the market using the computer’s signals. A guaranteed stop can help offset this market phenomenon.
  • Duration – The expiry period on certain spread bets. 

How To Start Spread Betting

Here is a comprehensive but digestible list of things you need to consider and act on before breaking into the spread betting market and risking your hard-earned money.

Choose A Broker

Choosing a broker is literally one of the most important decisions you’ll make in your investing career when you’re looking at any tool or market. Spending the time and energy now, and on an ongoing basis throughout your evolution as a trader, will be important to your overall success; but cutting corners here and settling because you’re eager, won’t pay off in actual gains. Take a look at these points of examination.

  • Price – Some brokers are specialists, and offer higher commissions on markets they don’t specialize in, basically to maintain “presence” in the industry. Brokers are just like any other company; they want to be competitive and profitable, and they don’t always use straight-forward marketing and tactics to achieve these goals. It will behoove you to look into the specifics of a broker’s pricing structure.
  • Requirements – Depending on whether you’re a high-volume trader or not, you’ll really want to pay special attention to things like their minimum requirements and equity margins. If the requirements are too high for the position you currently find yourself in, you’d be better off looking somewhere else until you accumulate more capital.
  • Features – Does your personal strategy require feature that are not offered by this broker? Double check before signing up; some brokers offer demo accounts anyway, enabling traders to test in real time the feature they offer.
  • Markets – Obviously, if the broker doesn’t allow you access to the markets you want to trade in, don’t sign up. What a waste that would be.
  • Customer service – Is it going to be difficult getting help when, and how you need it? 24/7 customer support is a competitive offer from many brokers, and if, the one you’re looking at doesn’t, or appears to be elusive with its contact information, just try to imagine the worst case scenario and it won’t take long before you’re looking elsewhere.
  • Regulation – Appropriate regulations from robust agencies an absolute must if you expect to have your money protected.
  • Tools & resources – Some companies have vast resources that are constantly updated by design and educational teams, providing extensive and in-depth market analyses, charting and news updates. Some even sport huge communities of people jostling around and providing help to one another. FAQ’s are a great place to look when you’re stuck too.
  • Bonus offers – Some brokers offering bonuses for opening an account above the minimum, while others make special deals with clients who sign up for specific accounts that they offer. Look into it, you may find a deal that benefits you.

Place Your Trade

After you choose a broker and fund your account, you’re ready to go. Here’s some things you’’l want to consider before moving forward.

  1. Choose your market – The best platforms, unless you’re just starting out and have no intentio of diversifying, are those that give access to a variety of markets.
  2. Decide on price direction – Do you want to buy or sell?
  3. Choose your position size – This is your bet size. Ensure that it is reasonable relative how you manage your money, you don’t want to get in over your head.
  4. Decide your price levels – This is your entry level, profit target and stop-loss targets. Performing an cross analysis will help you maintain your strategy from the very beginning.

Strategy

Brass tax, it won’t matter how intelligently you manage other aspects of your life or how confident you are about your new venture; if you don’t have a well thought out short and long term strategy, you will find out quickly that this style of trading just isn’t worth it.

“All right,” I hear you say, “what makes a sound strategy?” I’m glad you asked.

Charts & Patterns

If you’re looking at historical data to predict future changes, then it’s likely that charts and patterns are your go-to. In your broker comparisons, you probably noticed that most of then offer similar charting tools, as a standard of sorts. (Candlestick charts, bars and lines and an array of other signals.)

Having a clear picture of your predictions based on the trends, illustrated by the data sets you’re using, the more competitive you can be about your actual trading, or, at least you can bolster your trading with actual data that hopefully gives you the advantage. It’s really a synthesis of things that will make you a good trader at the end of the day, but accurate, on going predictive capability is key.

Corporate Actions

If you’re really, truly not interested in technical analyses, then it’s possible to make your predictions and trade based solely on things like news events and global climate watching. After all, corporate shifts and business events are harbingers of stock fluctuations.

If you’re the type of highly focused pro who’s watching for Instagram to declare a dividend that expires, and you’re staying ahead of the game, then you’ve got an edge there. If you take a position that to profit from a potential price jump, then you make money proportional to that increase ahead of the announcement.

Entry & Exit Points

A good strategy balances profit-and-loss. Let’s say a trader wins 4 spread bets out of 5, with an average win rate of 80%, and yet another trader wins 2 out of 5 bets, giving him a 40% win rate. You may think based on the superficial numbers that the former trader is the more “successful” one of the two. But how structure your bets drastically affects your gains. Let me explain:

If our first trader has taken the position of receiving $10 for each winning bet, and losing $40 per each losing bet, then even with that 80% win rate, his profits are negated by the $40 he lost on that one wrong bet. He wins $40 on the first 4 successful bets, and loses $40 on the one unsuccessful bet.

Conversely, out latter trader, let’s say, takes $25 on each successful bet and loses $5 on every losing bet. Even with a lower, 40% win rate, this trader still gains a $7 profit, despite losing 60% of the time. Gotta pay attention to the deeper numbers.

The best strategy, therefore, is one that balances all the mitigating and enhancing factors that impact overall profit, and not just a great win/lose ratio. Study and develop your own style, and make sure that your strategy conforms or accommodates this style, and you’ll be more likely to come out in the black.

Consider this a short guide on how to get started and how to construct your winning strategy for both short term and long-term goal fulfillment.

Spread Betting Tips

Never Stop Learning

Nelson Mandela is widely credited with the maxim– “I never lose; I either win, or I learn.”

You shouldn’t take it as literal gospel in the world of stocks, because you can really lose in stocks, but the take-away here should be that a good trader should never stop learning. If you stop learning, you give up the potential for growth and dominance. My dad always said “If you’re not getting sharp, you’re getting dull.” And that’s the truth.

Take advantage of the resources offered by the plethora of brokers out there, and grow your supply of knowledge. The market is always changing, and so should a competitive trader. Below re just a tiny fraction of the resources available for free in most cases.

  • Books & Ebooks
  • Videos & tutorials
  • PDFs
  • Blogs & forums
  • Online instruction guides
  • Magazines, webinars & online courses

News

The Basics:  Follow the news. Fluctuations are often predicted by the ripples caused by global or local events, depending on your market. Paying attention to any and all changes as best you can will definitely help you predict changes with greater accuracy.

  • CNBC
  • Yahoo Finance
  • Google Finance
  • Business Insider
  • Bloomberg
  • Reuters

These are just a few of the sources you can watch for changes.

Demo Accounts

Demo Accounts are a risk-free way to test your style and effectiveness. It’s also a fantastic way to trial your broker and platform first. Most of the big brokers now provide this service, free of charge. To make the experience more immersive, you “account” is funded with dummy money, so you can trade with real elements with not material risk if you fail. But you still get to see how it would’ve played out for you in real time.

Trading Journal

It’s not just about moving forward at a relentless pace; being successful is also contingent on your perception of the past. 20/20 is everyone’s friend in stocks. Using a clear, effective mechanism for analyzing your trade history is key to developing better strategies in the future.

Keeping a journal on a spreadsheet is a good idea, and can help you track the pathology of your development.

  • Position size
  • Entry point & exit
  • Price
  • Profit & loss
  • Reason for making the trade

Take a note of this and you’ll identify areas in which you personally could improve.

Risk Management

The pros will tell you (or not, depending on how secretive they are about their methods) that you need a safeguard strategy that you stick to, and stick to faithfully. Financial ruin is just a couple of rash decisions away, after all. Break from a successful format at your peril.

A good safeguard is never risking more than 2% of your total capital (banks should really follow that rule). Using this rule, if your balance currently sits at $50,000, you should never risk more than $1,000 on any given trade. You never want to lose more than you can actually afford, and this just one potential strategy you can use to save yourself a world of hurt in the long run.

Automated Systems

Technological advancement has been, and continues to be, the driving force behind innovation in the industry. Never has this been more apparent than with a tool called automated trading. With automated trading, a trader is able to place a multitude of trades (more than he could reasonably track on his own at any given time) and manipulate them according to a set algorithm or criteria, using bots to do the work.

Tech companies have also produced automated tax software that keeps track of your taxes in an exportable file system, making it easy to file. I wish I’d had that some years ago. This all saves you your most valuable asset; time.

Tax

Never forget the looming specter of taxes. Depending on your country of residence, the tax obligations will change, and if you’re not up on the code, you’re as good as ruined.

Remember, the taxes vary from Australia, India, Malaysia, Ireland, Singapore, Nigeria, Germany, Dubai, Greece, and New Zealand. Figuring it out before you begin; things like profit tax and how much, will make a huge impact on your trading style and strategies. You stand to risk everything from money to your freedom, so do the work now.

Success Stories

Spread betting is illegal in many countries, and though you should take their motivations into account, don’t let that dissuade you if it is legal in your country. This method can absolutely change your life fo the better, and we’ve compiled a list of a few compelling successes.

Facebook

Back in 2012, one clever individual made over $3 million dollars when he bet that Facebook stock would plummet in May. He was right, as it turns out, and at $8,000 a point, the win was considerable.

Euro/Dollar

Using IG index, some savvy investors nailed a huge decrease in price from $1.45 to $1.25. That was an incredible 2000 point move. Some gents cashed out at $25,000 a point. That’s a total profit of around $50 million.

UK Interest Rates

If that doesn’t convince you of the high impact nature of this method, will £110,000 in earnings, in just 10 seconds, do anything for you? Back in 2008, a trader bet that the Bank of England would decrease interest rates by more than 1% in November. The market skyrocketed to 96.31, netting him 51 times his £2120 investment.

As you can see, a large number of people make a good, or better than good, living spread betting. It’s a high risk/high reward market, and if you have the patience and acumen to corner a good strategy, you cold become a millionaire.

Final Word

If you’re a spread betting day trader, what you can look forward to is a high number of spreads each day that focus on tight spreads and markets that are always changing. As always, though, doing this for money is not an easy venture, and anyone who goes in thinking that will be rudely awoken to the harsh reality. We can safely, and without prejudice, say that if you use the tools and tips I mentioned, if you get hooked up with the right broker for you, and you’re patient, you can start out confidently, and perhaps begin making your living on a day to day basis in a relatively short span of time.

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Justin N. Richards

Justin N. Richards is a Florida-based technical analyst, market researcher, educator, and trader. Justin began his career in Chicago in 2001 performing futures market analysis for floor traders at the Chicago Board of Trade and the Chicago Mercantile Exchange. He also worked for numerous brokerage firms during that time, all of which hold him in high regard, and he has been providing outstanding analysis services for traders worldwide ever since. Mr. Richards is an expert in the area of market patterns, price and time analysis as it applies to futures, Forex, and stocks. In addition to these talents, he provides educational services for investors looking to improve their analysis and trade skills. Justin has a B.A. in Business Administration from UCLA and an M.S. in Financial Markets and Trading from the Illinois Institute of Technology. Justin’s professional experience, education, and discipline, not only make him an exceptional analyst, they point him out as a reliable, hard working and intelligent business strategist who is dedicated to his craft.
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