Spread Betting Tutorial
This financial spread betting tutorial takes you through the basic steps in making your first trade. We include setting a stop and limit, placing an order and closing a bet. If these concepts are new to you we recommend you catch up with our introductory beginner's guide to financial spread betting.
Spread betting example
Let's suppose you wish to place a bet on the Dow Jones Industrial Average (the principle US stock market also known as Wall Street), because you believe that it is due for a rise and you wish to cash in on this. The first thing to consider is how you came to this decision. If you want to be successful at spread betting it's important to have a strategy that has been tried and tested and which you understand and are comfortable with. Some people like to just go on gut feeling or pot luck. Nothing wrong with that but you won't make reliable or consistent profits this way.
Finding your spread bet opportunity
Let us suppose then that your method is to study the charts of stocks and stock markets and you notice that the Dow Jones Industrial Average is currently near the bottom of what's called a trading channel. As can be seen in the chart the Dow is oscillating between two trend lines and the theory says that until it breaks through the top one or drops below the bottom one it will continue in this up and down motion (incidentally you will need to draw upon your own knowledge and experience to determine where these trend lines lie, as the charts do not provide this information). So ... by looking at this chart you surmise that:
- The Dow is, more likely than not, going to rise (remember we're dealing with probabilities here. This one may not work out but keep it up and you will get it right more times than wrong).
- It will rise from its current level of 8500 to around 9100.
- Once it has reached this value of 9100 it is likely to repeat the cycle and head south again.
- If it falls significantly below 8500 then the pattern is broken.
So taking these predictions into account, you want to:
Place a bet that the dow will rise.
If it falls below 8400 you want the bet to automatically close because the trend is broken and who knows where it's heading from there.
Once it reaches a value of 9100 you want to close the bet and take your profits because you expect it to turn around and come down again.
These numbers are not precisely taken from the chart. There is a bit of an art to financial spread betting and another trader with differing experience may have picked out slightly different values from the same chart. Out of interest the reason shares and share markets go through these patterns is in part because traders do just what we're doing here - i.e. buy at the bottom and sell at the top, causing the share price to go up then down.
Just to further confirm your conclusions you hear that the latest economic data from the States is better than expected, which gives you more cause to believe that we're in for a rise. It can be a good strategy to only act on charting trends when it is backed up by relevant news data.
If studying charts to find opportunities appeals to you then read getting started with technical analysis.
Making the spread betting trade
The next step in this financial spread betting example is to place the bet. Now that you know what your bet is going to be you need to log in to your account. If you don't have an account already you can always sign up for a demo account and try out these steps with fantasy money. When the trading platform opens in your browser the first thing you are likely to see is a list of shares and stock market indices. Each spread betting company has its own platform and although they are all very similar they each have their own characteristic way of doing things. Most will offer a list of the more popular instruments on the opening screen, but others may make you search. The one you're looking for is 'Wall Street Rolling Daily.' Once you've found it you can easily add it to your portfolio or watch-list for future use. The 'Rolling Daily' bit is quite important. It means that if the deal is not closed through triggering stop or limit instructions, then the bet automatically rolls over to the next day and will keep rolling over each day until it is closed. This is the kind of bet you want because if you look at the chart it looks like it could take a week or two for the Dow to reach it's target. If you don't see the phrase Rolling Daily then it means any bets will automatically expire at the end of the trading day. Some day traders prefer these because they don't like having positions open overnight in case something drastic happens. We don't need to worry about this because in this spread betting example we will be setting a stop to act as a protection.
In line with our chosen 'Wall Street Rolling Daily' you should see a button marked 'trade,' which will take you to a screen where you can enter your bet. Again, platforms will vary in exactly how this is arranged. The first thing you should notice is that the price is constantly changing. A liquid market like the Dow is never quiet and will be constantly shuffling by a point or two. When you click to confirm the order the price that's showing at that moment is the bet that is made. At this point we will need to enter three numbers:
- The price per point we wish to bet.
- The value at which to trigger a stop (bailing out).
- The value at which to trigger a limit (profit taking).
Let's start with the stop value. We decided above that if the index goes below 8500 then the pattern is broken and it could keep sinking. So let's decide to close the bet at a value of 8400 or below. So the stop is set to 8400. Next to set is the limit. We predicted the Dow would reach a value of about 9100 and bounce back, so let's take our profits at say 9000 or above. Our limit is therefore set to 9000. The next decision to make is the price per point. Suppose we set a price of £1 (i.e. for every point the Dow rises we win £1). Given that we aim to take profits at 9000, and with the Dow currently at 8500, that would be a gain of 500 points - or a profit of £500. On the other hand the most we could lose is 100 points (£100), because 8400 is where our stop automatically kicks in (8500 - 8400 = 100). You might decide that this is too timid and you want to set a stake of £5 per point. This would give you winnings of £2,500 and a maximum loss of £500. Some companies have a minimum stake of £5 or even £10, which is only for those with lots of money or experience. More companies these days are offering trades as low as 10p a point: much better when you're starting out.
Now we've set our stake, our limit and our stop. All we have to do now is click to confirm the bet and wait.