subject: The secrets of profitable spread betting [print this page] To understand how to make money with spread betting you need to understand how you can lose it first. This may sound counterintuitive, but trust me - if you don't know what you are doing with spread betting you CAN and WILL lose money, and quickly.
I recommend that before you invest a single cent or penny you read as much information as you can. I also recommend looking at a trading system like John Campbell's see http://tinyurl.com/35cf4g2 - as a decent trading system is a good basis for profitability. The alternative is like tossing a coin.
Trust me,it will be money well spent. In the meantime, here are my top tips for keeping out of the red.
1. Don't have enough money in your account
When you first set up a spread betting account you will need to deposit an amount of money with the company.How much you deposit is up to you, but a word of warning - if you don't deposit enough you are virtually guaranteed to fail. Why? When you open a position (or place a bet, which is what you are really doing) you will instantly start the clock running. All the time the bet is in operation the spread betting company will monitor your "margin". That is, do you have enough money on account to cover your potential losses? The actual formula they use will vary for company to company, but if you don't have enough cash on account to cover your potential losses at any one time they may automatically close your position. Obviously, if they do that you will take a loss, whether you like it or not. This can be galling as the share price or index may recover shortly after they close your position, but by then it is too late you made a loss. Some companies will email you and warn you that your margin is getting low so that you can top it up, but not all will. So trading with just a few hundred dollars or pounds on account is virtually guaranteed to cause you to be "stopped out on margin". And you lose. You may need to have $1,000 - $2,000 on account at all times, even if you only have one or two positions open at once.
2. Make sure you monitor intra-day price swings
If you have been a stock trader you are probably used to the day to day swings in prices. A stock may close on Monday at $2, and on Tuesday at $2.10. It is a natural conclusion to think that the price only varied by 10 cents over that 24 hour period. But not so the price will vary minute by minute and could have dropped a dollar or gone up by a dollar over that period. If you don't realise this you may set a stop loss at $1.80 when "BUYING" a stock at $2.00. What then happens is that sometime during the day the price swings below $1.80 and you get stopped out and lose! The price may recover, but it is already too late. So either watch the price on a minute by minute basis or set a stop loss way below the current price (if in a "BUY" position). It is the same with a "SELL" position, but in reverse.
3. Buy a daily position and lose out automatically at the end of day
When you buy a position you get the choice of buying a daily position or one with a future expiry date. If you buy a daily position and don't watch the price it will probably be automatically closed at the end of the day, whether you are in profit or not. If you think the price of your stock may go up, but you don't know over what timescale, buy a position with an expiry at a later date such as a December expiry if it is October. That way you won't be forced to sell at the end of the day, but it will roll over until YOU want to sell. This leads us on to the next point.
4. Make a note of the future expiry date
When you open a position with a future expiry, say "December" this doesn't mean it will expire at the end of December The actual expiry date will be different and could be 14th December (in this example). You need to check the actual expiry date with the SB company before you place a bet. If you don't you could be closed out automatically without realising it.
5. Don't bet against the market
I'm sure you've done this. Your major index is up above its 50/200 day moving average. Your stock price is also up against its 50/200 day moving average too, but you FEEL that the price is too high and MUST fall. The stock price will actually do what it wants it doesn't HAVE to do anything. But if you bet against the market your odds of doing the wrong thing go up dramatically. Never bet because you have a GUT FEEL that a price will rise or fall.
6. Watch out when buying SELL positions
The natural movement of the market is usually upwards. Yes, we have bear markets, but generally over time the market rises, especially at certain times of the year like December ( the regular pre-Christmas bull run). So the odds of making money with SELL positions are generally less favourable than using BUY positions. A price won't just head south because you think it ought to.
7. Always cut your losses
If you are in a losing position make use of a stop loss, even if it is manual one. Get out quickly before losses mount. Human nature is to hang on for dear life and watch your losses mount up. Get out and make another bet or hold off completely.
8. Don't overtrade
You may be tempted to take out multiple positions. This is fine if you have sufficient funds on account, but if you don't you could find yourself stopped out on margin as your losses mount (see the earlier point). This can be annoying as individual losses on bets may be small, but collectively you have a large loss. If your money on deposit doesn't cover your potential losses ALL of your positions may be closed and you lose.
9. Let your profits run
This is quite common. You've been watching a bet swing from profit to loss over a day or so and eventually it reaches a small profit. With a sigh of relief you close the position and take a $25 profit phew! Over the next few days you see the price move up further and wish you had let it run. The moralis clear, once you have done your research and placed a bet if it is showing a profit think about letting it run you may make more money. Let your profits run and cut your losses quickly is a better strategy than cutting your profits quickly and letting losses run but people do it all the time.
10. If you can't stand the heat
Spread betting can be very stressful. With stock trading if you are not seeing a profit on a blue-chip stock you can always hold it and bank the dividend. The chances are that if it is a Fortune 500 or FTSE 100 stock it won't go bust, so holding it is not a big problem in the short-medium term. Remember, you only lose money on a stock trade if you actually sell. But with spread betting losses can mount quickly. A $5 or 5 per point spread bet on the Dow or FTSE can turn into a $1,000 or 1,000 loss in less than one day. Unless you have sufficient funds on account you may be stopped out and it becomes an instant loss. Believe me, it happens. If you are losing sleep over your spread betting it may be time to think about alternative investment methods.
I hope this 10-point guide to "how to lose money" means that you are better placed to decide if spread betting is for you.
