This week Dominic Picarda looks at pairs trading and how this could be a beneficial trading strategy.
The reason that we don't currently pay capital gains tax on our trading profits is because, under current UK tax law, Spread betting falls under the convenient tax bracket of "gambling". However - it shouldn't be treated as such when it comes to placing your trades.
The Reason
When you place a trade you should have a reason. "Because it's gone up a lot today" is not really a reason as you might as well toss a coin. A proper reason for a trade could be something fundamental such as research you've carried out into news, company earnings, economic data or perhaps something technical like analysis of a chart.
The Limit
Once in a trade you might want to consider an exit strategy to collect your profit. If you place a limit order to take profit 50 points away, this could be construed as an arbitrary number 'plucked from the air' but if your research dictates the market will rise by 42 points, you could put your limit order there - a more thought out approach. Remember, your research determined your entry point into the trade; the same research should determine your exit price for your limit order.
The Stop-Loss
A similar logic applies to your stop-loss. Our system selects your stop-loss for you based on the funds available in your account. If your research shows the stop should be further away (or closer) than the stop loss selected by our system then remember you can change this level to the price at which you feel you should get out of your trade.
Account management is just as important. Try to avoid staking all of your trading resources on one trade. If it goes wrong you will not have resources for the next opportunity. With £1000 on your account, a more prudent account management approach would be to only stake a maximum of £100 on each position you enter. This gives you the chance to get a few trades wrong and still be able to continue trading.
Remember, using the stop and limit order facilities within Tradefair Spreads, coupled with prudent account management techniques, will enable you to make the most of the chances afforded from financial spread betting for a successful trading career.
Until next week, happy trading
The Tradefair Spreads Team
The above comments do not constitute investment advice and neither Tradefair Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning:
Spread bets carry a high level of risk so you should only speculate with money you can afford to lose. You can lose more than your initial deposit and stake. Before you open an account, please ensure that spread betting matches your investment objectives, familiarise yourself with the risks involved and if necessary seek independent advice.
Article provided / approved by Tradefair Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
Tradefair® is part of the Betfair Group.
'Trading and Gambling' edited by DB, updated 14-Aug-09
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Risk Warning:
Please note that spread betting and CFD trading carry a high level of risk to your capital. You can lose more than your initial deposit. These products may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.
