How to do well in financial spread betting

Financial spread betting can be a great way to make money either by trading full time or on a part-time basis. However, it can also be very risky if done without research and a proper system in place dictating your bets. Spread betting offers the chance to make great money or just as easily blow it after succession of failed bets.

Devise a system and stick to it

Since almost 8 in 10 people lose money from spread betting (although this figure is improving), an overwhelming number of them do so because they do not take a few simple measures that could drastically improve their chances of making money. What sets the successful spread trader apart is that they stick to a successful system that determines when to place the bets and when to get out.

• A system is an overall plan that dictates how you come to your buying/selling decisions, how much loss you take on your trades.

• A system typically makes use of technical analyses to determine at what point you will make a spread bet .

• The system will also determine the percentage of loss you are willing to take on each trade for unsuccessful bets.

Two very important things to bear in mind when devising your system

• You will need to read up on how to read charts so you can come up with your buy and sell signals. Charts should be the key part in your decision-making. Fundamental data (financial data) of a company is not highly relevant because spread bets are made for a very short period of time, so you will need to become proficient at technical analysis. It is better to learn well a few technical systems very well rather than having incomplete knowledge of lots of them. Use these few to derive your buy or sell signals. For example, you could learn about range trading, relative strength index, the power of momentum trading, etc.

• Although the system should be flexible so you can adapt it as you learn more about technical analysis, you should nevertheless strictly adhere to it in order to make the system work. You cannot bend the rules as and when you like, otherwise, the system will have little significance.

Psychology plays a great part in day trading, it can always be tempting to for example, not adhere to stop losses by widening them in the belief that the price of a stock or any other instrument you bet on will reverse any time soon. This is a recipe for disaster, yes, you may get lucky on a few occasions and the price might indeed reverse in your favour and end up with some nice gains, but these are very rare and contrary to a system.

Stop Losses

A stop loss is a predetermined figure that you set at which point the trade (bet) will automatically close.

To illustrate this point, we could use a hypothetical example. Lets say we have company X trading at £2.00 a share on the stock exchange, a spread betting firm could price their quarterly contract at 1.99-2.01 (1.99 being the sell price and 2.01 being the buy price). If you decide to buy (i.e. you expect the share price to increase) the stock at £10 a point movement in their price, you would need to get in at 1.99.

If you decide to use a stop loss of 10%, you will need to set it at 1.81 because it is 10% away from the buy price. So, if your spread bet goes wrong, it will automatically close when the offer price reaches 1.81, unless of course, you decide to close the trade before it reaches the stop loss.

This has undoubtedly been the most important tool devised by financial spread betting firms that have helped people to reduce losses on trades and help them better plan their overall strategy and objectives with their spread betting account. You should place a guaranteed stop loss on you trades because, no matter how well you have planned your trades, there will be some that go wrong.

• It is important that you set a predetermined figure to cap you losses. An aggressive figure could be 10% and more conservative figure will be around 15% away from the price at which you get in.

Trading few at a time

Beginners to financial spread betting would be advised to only trade one, perhaps two instruments at any one time. Trading too many at any one time can get confusing and could end up getting out of hand for a relative novice.

Choosing a few stocks and indices to trade

It makes more sense for some with a financial spread betting to trade just few stock and indices rather than trading a huge array of instruments. This would allow you to learn as much as you can about these few instruments and the way their prices behave to certain factors such as micro and macro economic conditions.