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Tuesday, 15 February 2011

How to Survive Spreadbetting

Spreadbetting is not the same as buying and selling shares, although the two are linked. In spreadbetting, the trader decides whether his chosen market will go up or down and places trades according to what he thinks. So, for example, if there is some good news on the horizon for a certain company, a trader could buy its shares, or instead, place spreadbets with a specialist firm.

The main advantages of spreadbetting are threefold:
1. There are no buying and selling fees.
2. There is no capital gains tax to pay on the profits.
3. It is possible to trade in a falling market as well as a rising one.

Other advantages are that it is possible to make instant trades online, although, whether this is an advantage or not will become clear.

I have been spreadbetting for nearly ten years now - with varying degrees of success. There is a lot of information out there about how to spreadbet, so this article is not about that. It is left for the reader to choose their own instruments, techniques and spreadbetting firms. They are all of a muchness and it is really up to the individual to decide what suits them. I trade the DOW Jones Index. But actually, many other indices, other shares and currency can be traded the same way. Also, I use technical analysis, while other traders use fundamentals.

Is it possible to survive spreadbetting?
The only way to survive is with discipline. Discipline of mind and discipline of action. Without it, the trader is doomed to chase his own index up and down, losing money like Autumn leaves along the way.

1. Have a realtime feed if you are going to be a day trader. You will need a good source of news and a good charting system. There are online sources and software available to buy. I am not really intending to advertise anything in this summary because they are all pretty much the same and the sources are easily found online.

2. Have a provider that you can trust completely. You need to trust them to make the trades when you want and to give you a good price. When I started, there were 4 points between the buy and sell prices. Nowadays, most providers give a single point. The way they get around this is to give a price which is removed from the actual price. So, for example, the Dow price might be 12289, the buy and sell price could be 12291-12292. So it is still a single point, but it is just a little removed.

3. Before trading at all, and also before trading each day, watch where the price is going and see whether it is following your system. Never start trading as soon as the market opens. Chartists will find days when their signals all indicate exactly what will happen like a beautiful symphony played out by the Philharmonia. Other days, the flags will be there, but the price will be moving all over the place. Likewise, people who trade on the news could find that this latest piece of news was already built into the price last week and what should have gone soaring up, just doesn't. If it is not going along with your ideas, then leave it. Do not be tempted to guess. Sometimes it is driven by news - and there are enough chartists out there to drive the market according to their theories.

4. Never, ever trade up to your limit. Each instrument has a built-in market requirement. So, for the Dow, for each £1 trade, they require me to have £120 in my account. Now, if I only have £120 in my account, I would never trade at a £1 a point. Because that would leave me 100% exposed to that market and in a very vulnerable position. If it all goes in completely the wrong direction, then I will lose my hat fast! So, after 10 years of trading, I will, at a maximum, place a 50% trade. That way I still have funds in my account to cover my back if things should go wrong.

5. Know your trade. Before you place your trade, know when you will enter, know when you will exit. Know what you will do if it goes the wrong way. If you don't know all these things, then go home and start again. You will not trade to the top of the peaks and the bottom of the troughs. Sometimes, the provider's price just does not get that far and sometimes it all happens so quickly that you blink and its gone. Read up about stoplosses and make sure you have them.

6. Something silly that everyone says, but which is true is never run your losses and never bank too early. It is true that someone without a plan (or a clue!) will let a small loss run out of control in the hope that it will reverse. In the same way some people bank, as soon as a small profit is made, only to see it shoot up another 50 points. How you're supposed to know exactly what it will do, i'm not sure, but it is good advice. If you are making a loss, try to look at it with fresh eyes. From the point you are now, (not where you started) will it go up or down? If it is going the wrong way, no amount of hoping will bring it back in line. Close the trade, take a second, and move on.

7. Regrets, we've had a few, but never when we are spreadbetting. The time to remember and mull over your failures is not in the middle of a trading day. If you are feeling emotional and fragile, then switch your computer off and go and do something else. Otherwise you will be trading out of desperation. Which is not a good thing to be doing anything out of. No revenge trading, no running scared and no desperate last acts of heroic foolishness. Not the right time nor the right place.

Hopefully some of these points should help someone survive, there are a few more, but it is getting quite long...

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