subject: The Advantages of Day Trading [print this page] The Advantages of Day Trading The Advantages of Day Trading
Spread betting has become increasingly popular in recent years and there are a wide range of spread betting companies and accounts to choose from.
The exact terms and conditions, number of markets, trading hours and platforms on offer vary considerably. It is therefore advisable to spend some time comparing them, before deciding which one works best for you.
Generally speaking, there are three main types of spread betting accounts. The first is a limited risk deposit account, which is really targeted at newcomers. Trades with this type of account often have an automatic stop order, which limits potential losses to a predefined level in the market. Although note that stop orders are not always guaranteed.
The second account type works like the first but crucially stop orders are not automatically attached to your trades.
The third type of account is the credit account, which, as its name implies, allows trading on credit. Providers are likely to ask for evidence of your ability to meet any potential losses, along with your trading experience.
Note that the last two accounts are often considered more risky and should only be used by more experience spread bettors.
Risk Management Tools
Spread betting is a type of leveraged trading, which means that your initial deposit can command a much larger position in the market. This can translate into leveraged (magnified) profits, but can also lead to losses which are larger than your initial deposit, ie your losses are also magnified.
Some of the most common types of risk management tools include stop loss orders, guaranteed stop loss orders and limit orders. A stop loss order is a tool that will close your trade at a predetermined price, should that trade be making a loss. However regular stop loss orders do not protect you against market gaps.
So, for example, let's say that you buy the Dow Jones when it is trading at 12000, and you set a stop loss at 11970. Should the Dow Jones index gap and drop to 11960, then your spread bet would be closed at 11960, rather than 11970 as the stock market index did not trade at 11970. The next traded price was 11960, and consequently your trade would be closed at that level.
However, say, in the same example, you used a Guaranteed Stop Loss, and placed it at the same level. Even if the market gapped and dropped to 11960 (ie didn't trade at 11970), your spread bet would be closed at 11970. This is because your stop loss was guaranteed.
It is worth noting, however, that guaranteed stop loss orders are a type of insurance against a market gapping, and therefore come at a small cost. Also you can often place a stop loss closer to your original trade than a guaranteed stop loss.
Therefore, both regular stop orders and guaranteed stop orders are forms of risk management tools that limit your losses.
Limit orders work in a similar way, however are intended to lock in profits, rather than limit you losses. Therefore, to continue from the previous example, if you bought the Dow Jones at 12000 and set your limit order at 12050, as soon as the index reached that level, your trade would be closed and your profits locked in. Note that limit orders are generally not guaranteed.
Charting Tools
Spread betting accounts often include access to charting tools. Charts display price movements using a variety of intervals such as minute-by-minute, hour-by-hour, day-by-day etc. Traders using technical analysis believe that price trends can help them determine which way a market will move next.
At a basic level, if a current price looks excessively high or low, based on the previous trend, you may decide to speculate on its downward or upward movement.
Information and News Tools
Markets can frequently be affected by news events, such as political instability, interest rate policies, corporate news and other global or local events. Therefore, a common spread betting tool is a reliable and regularly updated information source.
Depending on your specific trading strategy and the complexity of your positions, you may choose from newspaper sources, financial newswires, financial analyst reports and other third party sources. Although a lot of spread betting companies will often provide some news and data to their account holders.
Financial spread betting is a leveraged form of investment, it carries a high level of risk to your capital and losses can exceed your stake. Please ensure that it matches your investment requirements as it may not be appropriate for all investors. Make sure that you fully appreciate the risks involved. You should only spread bet with capital that you can afford to lose. Seek independent advice where appropriate.
