Successful Spread Betting Techniques
1. Always, always set a stop order
This is a golden rule. Because of the 'leveraged' effect of spread betting your losses could in some cases be theoretically infinite. Therefore it is vital you manage each trade's exposure by setting a stop loss. To find out more about setting a stop see our financial spread betting example.
2. Running a trailing stop
Once you are comfortable with setting stops the next stage is to practice setting a trailing stop. Say you've placed a bet (with a stop of course) on a currency going up and it duly rises. You will then accordingly want to think about increasing the level of the stop so that if the currency does start sinking you will lock in some profit. Typically a trader will keep setting the stop at about 5 - 15% below the current price. In this way, as the price rises the stop level trails 5 to 15% behind.
3. Diversify: balancing your bets
Say for example your area of expertise is technology and you are optimistic about a range of companies, you might consider placing buy bets on these. This is dangerous. If you put all your eggs in one basket you can be cleaned out by a single event such as an internet company going bust, which can spread gloom around the whole sector. Obviously you will have set stops so it won't be catastrophic, but having all your open bets losing in one go is still bad for business. To avoid this you need to diversify by placing a bet in the opposite direction. Thus continuing with the above example, if you buy good shares in a technology company you like, you should also place a sell bet on a technology company you think is overrated. Thus if sentiment changes about the sector, you may lose on your up bet but would balance out your losses when the overrated company takes a nose dive too. You should always consider having a mixture of up and down bets so as to balance and protect yourself. Another way to balance is to bet on stocks which tend to move in opposite directions. Here are some examples:
- As oil prices rise the motor industry suffers
- As interest rates rise stock markets fall
- As stock markets fail money flows into the bond market
- A weakening pound is good news for UK exporters
- As the dollar rises the euro tends to fall
This tends not to apply to companies in the same sector so if Tesco posts bad growth figures this is not likely to be good for Sainsburys either, as companies in the same sector tend to get tarred with the same brush.
4. Diversify - spread the risk
Another way to diversify is to spread the risk over a number of different types of positions. There are several ways in which you can diversify:
- Trade in world markets (UK, US, Far East etc.)
- Trade a mixture of volitile and slow moving stocks
- Trade differing instruments: currencies, commodities, stocks etc.
- Run a mix of short, medium and long term bets.
5. Be Professional
Keep records of all your trades. Pay particular attention to your overall winnings and losses. If you are running more than one system keep separate records for each. If you vary your system keep a note of exactly when. If your method involves some research keep track of how much time you invested and your sources. Every 3 months review your data. Evaluate the effectiveness of your system(s). Look for any patterns. If you keep detailed records in a spreadsheet you can easily get it to tot up profits for particular cases, such as all your currency bets or all your down bets. You could also compare your medium term against your short term positions. Find out what's working, root out what isn't, revise your system and start afresh.
6. Never add to a losing position
If you decide a share is due for a fall and go short and then the share defies you and keeps rising, there is a temptation to argue that now it's higher its even more likely to fall. You then place another bet in the hope of recouping your losses. The trouble with this of course is that the share can continue to rise and you are therefore throwing good money after bad. A better technique is to do the opposite. If you have a winning position consider adding to it. The best way to do this is in what's called a 'pyramid trade' where the amount you add is less each time. So if for example you have a winning bet of 30p a point, place an additional bet at 20p and if it continues to head in the right direction add another 10p. By adding ever decreasing amounts this ensures that if the bet starts losing your losses will be minimal.
7. Stick to your system
There are any number of financial spread betting systems so it is important you settle on one that works for you and stick to it. This is not to say you should be stuck with it for life, because market conditions change and what used to work in the past may stop being profitable. If that happens you need to try a new system. Test it out with a demo account and if it seems to work adapt it. The simple fact is you cannot make money without a system. Seat of the pants stuff does not work.
8. Trade with the trend
Trading with the ongoing trend (otherwise known as momentum trading) means betting on a share that has been previously been rising continuing to do so in future (or likewise selling something that shows itself to be in a downward trend). To some this may appear counter-intuitive, the argument being that if a share has risen a lot it is due for a fall; after all what goes up must come down. But this is not necessarily so. There is a law in nature that something will continue in motion until an external force acts upon it. This seems to apply to shares and markets. There are many city traders who employ this simple technique of riding on the back of a trend. Whatever you do avoid betting against the trend as that can damage your wealth.
9. Don't follow the crowd
Long-running trends will often experience a 'trend reversal' - a point at which sentiment suddenly switches and a soaring share price can dramatically change direction and head south. These sudden changes are often accompanied by a 'volume spike,' as there is a burst of buying and selling activity when millions of shares change hands. It is at this point that the crowd is most excited by the share, believing its rise will carry on indefinitely whilst the smart money is bailing out. Be wary of this. If you notice a lot of popular opinion and media coverage indicating a firm belief that something is either a very good or a very bad thing, don't get taken in. In other words if Joe Public comes round to thinking that something really good is going on and he wants to join the party, then likely as not that party's already over.
10. Never catch a falling knife
This adage means if you see a price dramatically plunging don't be tempted to grab it as a buying opportunity because it is just as likely to continue falling and hurt you further. Another variant of this is 'bottom feeding' where investors look for stocks that have plummeted and are bumping along the bottom. This can work for long term investors who are prepared to sit it out and wait for a recovery, but it is not suited to spread betting which is most profitable with short term positions.
11. Never try to predict the top
This is just as the rule above. Avoid selling short when you believe the top has been reached, because you will get it wrong more often than you guess it correctly.
12. Let your winners run
There can be a great temptation when you see one of your bets in profit to take those profits while they are there, not wanting to lose them again. The theory here is that if you make sure you bank your profits you will over time make steady gains. The truth is that most successful spread betters incur a lot of small losses but every now and again this is more than made up for by one big winner that just keeps on running and running. If you are too itchy to take profits you guarantee that you will never have one of these big winners.
13. Dump your losers
This goes along with the above technique. We all want our losers to turn round and become profitable, but don't let that desire cloud your judgement. In other words, don't kid yourself that although it's gone badly things are bound to turn around. Losers are losers: dump them.
14. Learn to sit on your hands
This simply means if you can see no obvious opportunity then don't be tempted to bet. This may seem the easiest of all the techniques but it is the one that so many novice traders fall foul of. You may have an excellent spread betting system but it is only as good as your self discipline. The time to look out for when the temptation is strongest is after a big loss where there is a strong desire to get stuck in and win the money back. Just remember that if you keep faith with your system you will come out on top in the long run.