Financial Spread Betting Strategies: Part 3 of Spread Betting Tips, Tipping and Strategies

Also See Daily Trading Tips

Limiting Risk / Removing Emotion

1. Set yourself a Total Loss Limit to cover all of your investing before you start trading with real money eg £5,000. As soon as you get to your Total Loss Limit, stop. Close your trades. Close your accounts and stop.
   
   By all means try again later but wait until your funds have been sufficiently replenished before starting again. In the meantime, take a break and/or paper trade and research. You're probably going wrong somewhere. Work out what it is that you are doing wrong so that when you start again you don't just lose another £5,000.

2. Always use a Stop Loss, it could cost a little more in the short term but it will stop you from holding on to poor bets. That will save you money and stress.

3. Consider using a Limit Order, ie an order to close a bet if it reaches a certain level. eg if you buy a share at 450 you can also place a Limit Order to close that bet when it hits 490. That way you automatically bank a 40 point profit (if it hits 490). Of course the share could go higher and you could have made more money. Nevertheless it keeps you disciplined, releases funds and margin for more trading and stops you holding on to a share after it's gone up and now on the way back down.

4. Guaranteed Stop Loss or Controlled Risk Bet. This should not be confused with a Stop Loss. Let's say you have a normal Stop Loss on a share eg Ericsson which you bought at 2830. Let's say your stop loss is 2790 but the company issues a profit warning and it turns into a bear market.
   
   The market doesn't always rise or fall smoothly, it 'Gaps' eg could fall from 2830 to 2822 to 2811 to 2791. At this point your stop loss hasn't kicked in. Now the next drop or gap could be to 2782. That's where your stop loss would be filled. Not at 2790. With a Guaranteed Stop Loss or Controlled Risk Bet you have a slightly wider spread to open and close the trade but your stop loss is guaranteed. eg in the above you would be closed out at 2790 not 2782.

5. Stop Losses are useful insurance but if you get into a trade and it looks like a poor decision then cut your losses. Don't wait for your Stop Loss to kick in. Get out of the trade and keep your losses as small as possible.

6. Clearly you shouldn't trade whilst under the influence of alcohol or any other substance. You're likely to place poor trades with a larger-than-usual stake size. Not a good combination.

7. Stick to your Trading Spreadsheet and plan. Plan everything and follow your plan. Make sure that as part of your plan you understand the risk-reward ratios. Also make sure you understand the market influences like government reports, related markets, Support Levels, Resistance Levels, historical price levels, seasonal influences etc.

8. Patience is a virtue and it's a virtue you need if you are to trade successfully. If there are no good trades to be done for a week or two then don't think 'oh I'll have a small interest on XYZ'. That's gambling. Wait for the right trade and congratulate yourself on being patient and for not losing any money. You've still been watching the markets, you've still been learning and you've not lost any funds. Well done.
   
   

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   I'm losing money, what should I do?

9. Stop trading.

10. Paper trade and do more research.

11. Don't 'chase your losses'. It's tempting to increase your stake size on your next trades to cover losses. It's tempting to open more poorly researched positions quickly in order recover losses. This will get you into more trouble. It will put more pressure on you and you'll start losing more money at a rate you never thought possible. Nick Leeson is a good example of someone playing the markets and chasing their losses.

12. Catching a Falling Knife, Averaging Down, Chasing Falling Markets. Please don't do this. Do not increase your position when the market moves against you. If it's moving away from you, accept your loss. Predicting the bottom of the curve is tricky. You are probably getting yourself into more trouble

13. New Lucky Markets. Sometimes you feel like moving to new markets because the markets you're currently trading on are losing you money or even 'unlucky'. That's like moving from the blackjack table to the roulette table. Fine for recreational fun, not for investing. Stick to the markets you know best

14. It can also be tempting to re-enter a trade after it hits your Stop Loss. You've already lost once on the trade, be careful.
    
    Do full research on the trade just like you would on any new bet and then only re-enter the market if it looks like a good bet. Make sure you don't repeat the same mistake on the same market. Do query why you are re-entering a market you've already lost on. A losing trade generally means that you're wrong.

15. Look at your Trading Spreadsheet and check your notes. Why are all those bets losing you money? Are there one or two pieces of research missing? If you had done the leg work would that have stopped you trading on most of your poor trades?

16. Look at your Trading Spreadsheet and check your notes. Why are all those bets losing you money? Be honest and ask yourself 'were those informed trading decisions or was I taking a punt?' If you're taking a punt, expect to lose money. You need to do more research in order to minimise the gambling element.

17. Look at your Trading Spreadsheet and check your notes. Is it that your winning trades are only winning you a little money and not covering your losses? That would suggest you are taking too many risks for little return or perhaps that you are closing your winning bets too early.

18. Work out what you've just paid for ie you paid for all your losses. Make sure you can take some useful information from those losses. Do your analysis. Update your plan. Remove as many errors as possible from future trades. Learn from your mistakes, they're not cheap.
    
    

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    Financial Spread Betting Strategies: Timing

19. Try to avoid trading at the beginning of the day. The markets can take a little while to settle and can catch you out. Also because the Market Makers don't want to get caught out the spreads are often wider. Consider trading 30-60 minutes after the markets have opened. You may lose out on some opportunities but you won't get caught out by unexpected news.

20. Note that you can't trade all the markets when the Dow opens - there is a staggered opening.

21. The markets can often have significant movements in the last 30 minutes of the day. As with the start of the day, things can be volatile and you're often best off not opening new positions at this time.
    
    
    Financial Spread Betting Strategies: Greed

22. Don't over trade on stake size - remember to only trade with money you can afford to lose. That means money that may make you upset but not money that will ruin Christmas or make your 'significant other' up sticks and run off etc.

23. Don't over trade on the number of open positions. A large number of Open Bets are difficult to research. It's also difficult to keep track of them all and therefore make an informed decision on closing them.

24. If you have a day job then compare that income to your trading income. Don't spend a disproportionate amount of time on trading and let it ruin your primary income source

25. Be wary of your willingness to accept any profit so that you can say 'yes, another successful trade'. You had a plan at the start of the trade for when to get out, stick to it. Don't let fear overcome you. Of course if there is new market information then you need to consider increasing or decreasing your exit level. Again note any change down on your Trading Spreadsheet. If you are closing out long-term bets for 5% profits you're funds are better off risk free in the bank.
    
    

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    Day Trading

26. It's probably best for a new investor to avoid Day Trading. You can often lose purely on the width of the spreads. The short period of time available is likely to make you more emotional and cloud your judgment.

27. Ask yourself why you are Day Trading? Day trading often goes hand in hand with greed. Are you so impatient that you need to open and close a position on the same day? If so, financial spread betting is probably not for you. Also if you want to make a number bets within a short period of time it's unlikely that you'll have done sufficient research.

28. Day trading is also very difficult if you have a fulltime job that's not looking at price movements all day.

29. If you do decide to trade over very short periods of time then you may be better off spread betting than buying the actual shares. You are liable for 0.5% Stamp Duty when you buy UK shares. Stamp Duty isn't applicable to spreadbetting. That soon adds up over a number of trades*.

30. If Day Trading is for you then be very careful with wide spreads and/or markets will little volatility. Otherwise you will 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, the price will probably close around 21 to 22p. If you bought at 23p you are likely to make a 1 to 2 point loss even if it moves in the right direction.
    
    

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    I'm winning, what should I do?

31. After you've had a good trade you'll often be tempted to have a more risky trade or increase your stake size on the next trade because 'overall you'll still be up'. Keep your money and don't give it back too quickly. Watch out when trading after good profits and stick to your strategy.
    
    
    Medium / Long Term Money Management

32. How long are you planning to trade for? Let's say you're planning to trade for a year. If so, make sure your trades are sufficiently small to withstand a series of losing bets. To have no funds after 2 months will guarantee that you'll miss opportunities further down the line.

33. Maximum Loss Size. Use a maximum loss size for every trade eg 1-2% of your trading funds. ie at 2% that's £200 on a £10,000 trading fund. Therefore set your Stop Loss or Limit Order at £200. At least that way you will need 50 pretty poor trades before you've lost the entire fund.

34. Stick around for the long haul. You should be a better trader after you've traded 100 times than before you place your first bet. You should be a better trader after you've spreadbet a 1000 times than 100 times.
    
    Your early bets are part of the cost of your 'training'. Make sure you can still spread bet further down the line, ie when you'll be making better decisions and know far more about the markets.

35. Don't trade unless you've got the finances to stay with a bet. If the market has a short term dip you may be forced to close a bet which you should have kept going.

36. Keep sufficient liquidity so that you're not forced to closed a good bet to keep another bet running.

37. If your personal circumstances alter so that you can't afford your positions and you cannot afford to lose the bets then close your positions. Any negative movements will only hurt you more.
    Stake Size / Position Size

38. Don't neglect the option to Part Close a bet and reduce your Position Size. If you've got a good position in a market and want to keep some risk but also take a profit then you can close, let's say, 50% of your bet. That will lock in some of your profit and leave 50% of your bet still running.

39. Make sure you're trading sufficiently large stakes so that you can actually reap some financial reward from the trade. To work out a sensible stake size work out how much you are prepared to lose on a trade.
    
    As always use a Stop Loss. Therefore if you're prepared to lose £100 and want a Stop Loss of 20 points then your stake size should be £5 per point. With volatile markets you may want to increase your Stop Loss limit and likewise in low volatility markets you may want to tighten the Stop Loss and increase the stake size as result.
    
    Once you've decided your Stop Loss you can then alter your stake size depending upon how much you're prepared to lose.
    
    

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    Other Areas to Watch Out For

40. Business Trips and Holidays. If you're not going to be checking the prices, won't have direct access to trading information and/or won't have access to making trades then tell your spreads company where they can contact you. Also consider closing or reducing your positions in order to lessen the risks.

41. If you're run down or have other influences on your personal life, you are best off limiting your trading. These elements can affect your judgment.

42. There are lots of different trading techniques and practices you can use. Make sure you avoid the trading techniques you can't implement or don't understand.

43. Some spread betting companies will hedge every trade you do against the underlying markets. ie it doesn't matter if you win or lose. Therefore they want to you win, winners are more active than losers.
    
    Other spreads companies however will play the bookie and only hedge some or none of your trades. ie they make more money if you lose, just like your local online bookie. Therefore you sometimes get the feeling that they are out to get you, especially when your trades are losing and the markets move unexpectedly.
    
    Most of the good quality spreads firms have pretty good customer service but they are human and will make mistakes. Always check your trades and trading history after every bet. If you have a query you need resolving you should ask to speak to the Customer Services Manger.
    
    If you feel like you are not getting anywhere then put your complaint in writing to the Financial Services Authority and follow it up with them.
    
    
    Trading Theories - Arbitrage / Arbs

44. Arbitrage is a way of guaranteeing profits. However you will need to be quick and have accounts with several spread betting firms. Don't rely on this trading mechanism. These days there are many 'executing spiders' (programs that work like search engines) that compare prices between firms and also execute any Arbitrage opportunity before you get there. The spiders often create a sudden rush of bets which alerts the Market Makers to the 'Arb'. He / she then moves / widens the spread accordingly.

45. If you do want to trade arbs then have a look at the Grey Markets like IPO pricing where there is more uncertainty about a price and therefore more likely to be an arb. eg
    
    Spreads Company A thinks Firm XYZ will go public with a share price of around £110 and therefore issues a spread of £105 to £115.
    
    Spreads Company B thinks Firm XYZ will go public with a higher price and offers a spread of £118 to £128. All you have to do is:
    
    Buy the spread with Company A at £115
    Sell the spread with Company B at £118
    
    Provided your stake size is the same you should have an automatic profit.
    
    

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    Trading Theories - Evenly Weighted Sectors

46. Many investors start off with Tracker Funds due to their quick, easy and low risk exposure to the markets. However sectors have a habit of over shooting and then coming back down to earth eg Tech Stocks in 2000 or Gaming Stocks in 2006. So even though these sectors are overpriced the Tracker Funds buy into these stocks and wait for a fall. Using Spread Betting Sector Bets you can readjust you portfolio to take these annoying anomalies out of the equation.

47. IPOs. When large companies finally go public they are often heavily oversubscribed eg Google. Small investors come pretty low down the list of participants. Hence spreads. In Google's case you were able to Buy the Google share price on the Grey market before the shares started trading publicly. This is good for getting a price quickly and also for getting back out quickly.
    
    However be aware that there are those rare occasions when the Issuing Company will issue far more shares than expected with little notice. Again you can use spread betting to protect yourself by trading on the Market Capitalisation the first day of trading.
    
    
    Trading Theories - Pairs Trading

48. Watch out for correlations between two companies. eg BP and Shell Transport and Trading. In the last 10 years Shell's share price has moved ahead of BP's price more than 10 times. After each occasion the shares have then come back together. Therefore wait for Shell's price to get closer to BP's and then Buy Shell and Sell BP. ie bet on the gap widening even if they both move up or down in price.
    
    This is a very standard pairs trade however it's not guaranteed. As with all markets, past results don't guarantee future performance.
    
    Another possible pairs trade worth watching out for is UK Crude Oil (Brent) v US Crude Oil (WTI).
    
    
    Special Orders

49. Sometimes you have the option of using an O-C-O or One Cancels the Other order. These allow you to look at different scenarios and plan them in advance. Basically this is setting two Limit Orders where only the first order is filled. ie if a Limit Order is reached for Trade N then that order is placed but it also cancels your Limit Order on Trade M. Hence One Cancels the Other. eg you have a position on PartyGaming and you think it will bounce back but that it could also take another tumble first. So if Party Gaming are trading at 27 - 28 you could set your OCO to Buy more if it hits 15 and another to close your current order if it hits 45 but do not do both.

50. Sometimes you have the option of using a Two Factor Sell Stop. This is handy when looking at correlating companies. eg you have a position in PartyGaming but 888 are suddenly due to have a press conference in the next day or so. Any new information could affect the whole sector. Therefore you can set an order that if 888 drops by 5% your PartyGaming trade is automatically closed.

The Spread Betting Companies?

Financial Spread Betting Strategies