Day Trading and Spread Betting
Clearly a very large topic. So for now we are just looking at this from the point of view of the less experienced spread trader.
Tip 79. Those new to spread betting can often benefit from avoiding Day Trading or, at most, trading with minimal stakes. One big problem is that the short period of time available is likely to make you more emotional and cloud your judgment. Many retail investors don’t react well to this sort of pressure and make irrational decisions they would not normally make.
80. Day Trading often goes hand-in-hand with greed. Ask yourself, ‘why am I Day Trading?’ Are you so impatient that you need to open and close a position on the same day? If so, financial spread betting may not be right for you. There’s certainly nothing wrong with opening a position in the morning and aiming to close out in the afternoon for a profit. But doing this day-in day-out can leave you open to all sorts of problems. If you want to make a large number bets within a short period of time it is unlikely that you will have carried out sufficient research.
81. Day Trading is also very difficult if you have a fulltime job that is not looking at the markets all day. If you are unable to keep an eye on the prices then no doubt your normal job will suffer and again…you could be making poor, rushed trading decisions.
82 If Day Trading is for you then be very careful with wide spreads and/or markets will little volatility. You can easily lose out to the spread itself. Eg the spread on a smaller AIM stock could be 20 to 23p ie a spread of around 15%. That market will have to move a lot before you make any money. Assuming it has a normal variation of 5% on a given day then the shares will probably close around 21 to 22p. If you bought at 23p you are likely to make a 1 or 2 point loss even the shares move in the right direction.
Are there any positives? Yes
83. If you do decide to trade over short periods of time then you may be better off spread betting than share trading. With equities you have to pay Stamp Duty which isn’t applicable to spread bets. With Stamp Duty currently at 0.5% in the UK that soon adds up over a large number of trades.
84. Although the width of the spread can be a problem, with the markets as they are at the moment, ie where you have the FTSE 100, Crude Oil, Gold etc all moving around rapidly the width of the spread is less of an issue. It should only play a small part in your trading decision. If the width of the spread for Crude Oil is 5¢ and crude is regularly trading 300-400¢ ranges (or more) on a given day…the spread is less significant.
85. Competition. These days there are a good number of spread betting companies offering good quality services. That has led to narrower spreads, particularly on the daily spot and daily rolling markets. For example, most of the companies featured on this site offer a 1 or 2 point spread on their daily FTSE 100 markets.
It’s not all bad news
Next time a few thoughts on managing your cash…so it doesn’t just disappear.