August 30, 2014

Key spread betting tips

Content provided by IG INDEX.

Financial spread betting is growing in popularity as more and more consumers see the benefits it can bring compared to more traditional types of trading on the financial markets.  It provides a tax-free ­– in the UK – way to make a profit from rising and falling prices on a range of different markets from forex, to shares to commodities.

While profits can be substantial so too can losses so it’s important to approach spread betting sensibly. Here are a few essential tips to help you start to build your financial spread betting career.

  • 1 Before you place your trade

Choose your market
Are you interested in the foreign exchange (forex) market? Or are you more interested in shares or commodities? If you’re more passionate about one financial market over another then that’s probably the best place to start to build your financial spread betting career.

Get to know your market and what influences it
The hard work starts now. You’ll need to learn what factors influence prices in your chosen market, and, depending on what financial instrument you choose, this will include a fair amount of research into the economic performance and political situation of individual countries.

Learn the economic fundamentals
There are many economic release calendars available online. These will give you the exact date and time of all the major economic announcements scheduled around the world. If you follow these religiously and monitor media reaction to them, within a year or so you’ll get to know the rhythm of the world’s economic reporting cycle.

Find sources of financial news
Okay, so we all know the FT, The Economist, Reuters and Bloomberg. But there are hundreds of websites out there and while the quality of these sites varies wildly you’ll be surprised how much useful information professional financial traders are willing to share. If you’re prepared to be thorough and to go niche or ‘longtail’ with your internet searches, the rewards are out there.

Learn the fundamentals of financial spread betting
While financial spread betting is very similar to trading in the underlying market you’ll still need to familiarise yourself with the patois used by the professionals. You should be able to answer the following questions really easily before you even contemplate starting to spread bet.

-          What are points? What are pips?

-          What is margin? What is a deposit?

-          What’s the ‘bid’ price? What’s the ‘offer’ price? What is the spread?

-          What determines your profit or loss?

-          What’s slippage? What’s a stop loss and how does it differ from a guaranteed stop?

Please click on this link to see the basics of spread betting explained.

  • 2 Choosing a provider

Do your research
Just like any major purchase the consideration phase for finding a spread betting provider should be a relatively long one. Find out the major players, compare their merits and hang out on traders forums and you’ll soon get to know what’s what. Beware of new spread betting companies offering big cash incentives to sign-up with them – not all spread companies offer the same levels of protection for your capital.

Find a provider and a dealing platform that is right for you
It’s important to do your research into the costs including the spreads and minimum margin requirements. However, it’s also important choose a robust and reliable trading platform that’s going to allow you get in to and out of a position at exactly the right time. It’s all about the speed of execution.

  • 3 Placing financial spread bets

Familarise yourself with the dealing platform
Before you start betting significant amounts of money it’s important to familarise yourself with the dealing platform you have chosen. This might be in the form of a demo account or just by using small bets. Indeed, the learning curve is always less steep when it’s your money on the line.

Always plan ahead and have a strategy for each trade
Once you’ve done your market analysis and think that it’s the right time to open a position it’s good to take a step back and plan your spread bet in detail. At what exact point do you want to get in? Should you place an ‘order to open’? When do you want get out? What’s the bet size?

Managing your risk
Which brings us to one of the most important components of any spread betting strategy: risk management. Always ask yourself: how much of my capital do I want to risk? And always use stops and limits on any bet you place.

Trade management
Opening and closing your positions are the easy bits. What happens in between is all important.

-          Running with profit
When is the best time to bank a profit on a spread bet? With financial spread betting a good way of protecting yourself against a sudden swing in the opposite direction is by setting a trailing stop-loss. As the position moves in your favour you should move your trailing stop-loss accordingly to lock in profits.

-          Cutting your losses
It happens. Some spread bets just go wrong from the start. Always remember it’s not a weakness to pull out of a losing position, it’s just the smart thing to do. But if you do stay in, don’t be surprised to find yourself sliding down this particular snake right to the bottom.

  • 4 Managing your mindset

Knowledge and skills are always useful but you’ll also need the right mindset to succeed long-term at financial spread betting.

Don’t be over confident at the beginning
If you think there is a short-cut and that spread betting is easy then as a beginner, more often than not, you will end up having a very short spread betting career. The key is to treat it as a career and not a hobby; do the homework first before you dive in.

But you’ll need confidence and determination to carry on
At some point you’ll go through a difficult run from which you’ll need a certain amount of confidence to recover. If you’re serious about having a career in financial spread betting there’s no shame in going back to the drawing board when a position goes against you and working out exactly where you went wrong in order to put things right for next time. Sometimes patience can  pay dividends.

Nick Dockerty is a financial writer and researcher for IG Index. The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.

Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.