Beginners Guide

I do not intend to explain the mechanics of spreadbetting in this section as I’ve already covered that. I recommend that you read the past modules and ensure you fully understand them before opening a spread betting account.

Financial spread betting can be very risky and requires that you fully and properly understand the relationship between what seems to be a small bet and a potentially large loss. It is recommended that you have traded equities or other similar financial instruments for at least two years before considering financial spread betting.

Why would you want to spreadbet? Spread betting offers an accessible method of trading a range of financial instruments which are not otherwise easily available to the private investor. Financial spreadbetting is, in the simplest sense, just another tool in the box of the financial trader. It should not be the first tool in the box and should only be used when you have read the instructions.

All of the spread betting companies have quite extensive Terms and Conditions. Before placing your first bet you should have read and understood the Terms and Conditions. If you require clarification on any part of what you have read then contact the spreadbetting company and get an explanation. Do not make assumptions. Assumptions are potentially very expensive.

Paper Trading

A useful and valuable training exercise is to paper trade. Paper trading is effectively practise trading. The only thing you do not do is actually trade with real money. You plan the trade as you would a real trade, get prices and make a trading decision. You now record the trade and include in the record the price you would have dealt at, the date and time of the trade, the stake and the type of trade. Record all matching closing trades. Make notes about each trade including what triggered your entry and the exit. Keep this journal going until you are satisfied that you can paper trade consistently and profitably.

By doing this you will hopefully develop and practise a trading style and technique which suits you personally. Methods and techniques which work for others will not necessarily work for you. Try to identify the level of risk you are comfortable with. Each of us has a different risk tolerance level and that which I may regard as fine you may be very uncomfortable with.

Penny Trading

A step on from paper trading is penny trading. At least one spreadbetting company will allow you to deal in penny a point stakes. Do exactly as you would do with paper trading but this time actually make the trade. Restrict yourself to pennies. Do not be tempted to increase the stakes at all. Remember, the purpose of this is not to make money but to practise trading. Even with penny trades you can be surprised at how quickly a trade can go wrong. Concentrate on developing your technique. As with paper trading you should maintain a journal.

Regularily analyse your trade record and look carefully at the trades that were successful and those that were unsuccessful. What are the differences? Do you trade better at certain times? Do you trade better on certain days? Are you better at identifying buy signals or sell signals? Is there a sector of the market in which you do consistently better?

Trading Tools

There is a section on this site dedicated to trading tools. I cannot stress enough how important good tools and data are. The spread betting companies employ professional dealers and use the latest specialist financial tools, price feeds and news feeds. You have to match this as closely as you reasonably can for a reasonable price. Many of the tools which are now available to the private trader/investor are of a quality and sophistication which would have been the envy of many trading rooms only a few years ago. The internet and cheaper permanent internet connections are making it far easier to get timely and quality information delivered to your desktop.

Be selective in the amount of data you try to process. I use Bloomberg and CNBC satellite television channels to keep me up to date with breaking and expected news. I use a few selected online discussion boards to maintain contact with other traders and get a few different perspectives on the market. I pay for live streaming data and realtime graphs. Do not even consider trading any of the indices or futures markets if you do not have realtime data.

Internet Bulletin and Discussion Boards

There are a large number of internet sites which feature online chat between users. Some are far better than others and some of the contributors are better than others. Be very selective and do not trade on the basis of someone else’s analysis or research without doing your own research first.

Reading chat and bulletin boards does not, in my view, count as research by the way. However, the bulletin and chat boards can be a useful forum for a trading opportunity or news to be brought to your attention which you can then further research.

Research, research and research. Look at company web sites, search the news sites, look at trade volumes and form your own view.

Training

A number of companies and individuals offer training in spread betting. Get and check up references and if possible speak to previous attendees. I recommend ignoring any which claim to show the way to incredible riches in a short time period using a small amount of money. The choice is yours but trading experience will quickly allow you to reject those whose claims are questionable.

In my opinion, no amount of training will make you a better trader if the techniques you are expected to apply are not compatible with your personality or risk attitude. So, if you are looking for training, question carefully exactly what you are getting for your money and the topics covered. If the content or the method of delivery is not for you then look elsewhere.

Capital Protection

There is an easy way to quickly lose money when spreadbetting and that is to use stakes which are too high. When starting you should only consider trading on a cash account and limit the size of stake to 0.025% of the available capital in the account. In practise this means that for every £1000 you have in the account your maximum stake per point would be £0.25. By using a percentage like this you are decreasing your stake size when you lose and increasing it when you win. You are also protecting your capital if a trade goes significantly against you. Capital management and protection is a very important part of successful spread betting.

Discipline

Difficult as it may be it is always better not to trade than to trade at a loss. If a day is going badly or you don’t feel comfortable about a trade then close all open positions and call it a day. The market will still be there when you return. There is nothing more disheartening than a losing streak and once into it is tempting to let failing trades run too long in the hope that they will come right. The discipline part is being able to close a poor trade and put it behind you. After a loss it is tempting to increase the stake on the next trade to catch up the capital lost. It is better to reduce the stake and concentrate on your technique and catch up with a number of lower stake trades. By using lower stakes you will be able to concentrate on the trade and not be distracted by the money. If all else fails then go back to paper trading or penny trades for a while, this will reinforce technique and discipline.

Don’t be distracted by what other traders are doing. Someone else’s trade is not a good indicator to use for your own trading decisions.

Get used to thinking in terms of points rather than pounds. This will allow you to be much more impartial about a trade.

Summary

Spread betting is not something for a chosen elite nor is it something which you should do without care and skill. If you use the right tools, trade the right markets, apply discipline, protect your capital and try to learn from the good and bad trades then with practise you should make money. The spread betting company does not care whether you win or lose as they hedge most trades in the market. Their profit comes from the spread and it is in their interest that you at least breakeven over a period as you will then remain an active client. Current indicators are that a significant percentage of people using spreadbets to trade will lose money. Take the time to learn the markets and techniques and be methodical and disciplined in your approach and be amongst the other percentage who actually make money spread betting.