Spread betting forum: ask the Expert



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Dear Trader is my attempt to create a manageable spreadbetting forum to respond to the many users of this website who write to me with general questions about spread betting. In the past, I simply responded on a one-to-one basis. However, many of the questions are of the same sort. As a result, I have created this financial spread betting forum section of the website so that other users can benefit from the questions and answers too.

Of course, if you have any questions of your own, do not hesitate to send them in using the contact form. I will post my response in this financial spread betting forum as quickly as possible. Mind you, I will only answer general trading questions as I cannot provide any investment-specific advice.

Cheers


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Question: Dear Trader, thanks for such a straight forward and honest website. I’m particularly impressed by your views on irrational expectations of people new to the stock market. It’s a breath of fresh air to finally come across someone who is not just feeding off other people’s overblown expectations. I have a quick question. What’s your view on the efficacy of moving averages? Is it reasonable to use say the 50 and 200 day moving averages for trading markets? [– Leanne]

Trader’s response: Hello Leanne, thanks for your comments. As you would notice by reading Spread betting opportunities, I do use moving averages in my analysis. This then brings us to the questions: why use moving averages and what are they useful for?

In my view, moving averages are most useful as benckmarks—sort of lines in the sand that provide useful indication of where a particular market currently stands relative to where it has been in the past.

Used incorrectly, they could be very misleading, but as a first line of analysis, they give a quick and easy indication of general/broad market tendency. For instance, generally speaking a stock trading under both the 50 and 200 moving averages would most likely be classed as weak. Again, as I mentioned above this should not be taken in isolation since such a stock could still be displaying underlying strength relative to the broader market.


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Question: Dear Trader, I subscribed to your excellent Spread Betting Opportunities after finding your site by pure luck through google a few weeks ago. Thanks for such a great site. I have been spreadbetting for about a year now and I understand that it can be challenging for newbies. But what do you think is the biggest obstacle to a successful experience as a private trader? [– James]

Spread bet Trader’s response: Thanks for your comments James.

In my view, the biggest obstacle facing most private investors (especially those new to the financial markets) is expectations.

Basically, the roaring stock markets of the late 1990s and the bull market that we have seen in equities since March 2003 have led a lot of people to the conclusion that the stock market is a mass get rich quick scheme.

The era of ‘irrational exuberance’ has paved the way for another era of irrational expectations.

Thanks to the ‘free evening seminar’ salesmen, many people now believe that they can go from complete novice to trading experts overnight and turn their £500 starting capital into £1 million in no time! Many online spread betting forums are filled with people who have obviously been sold this garbage.

Well, if it were that easy there would be no body left working in the City since we would all have packed our bags and moved to various islands in the sunny Caribbean ;)

To put things in context, over the last 100 years, the FTSE 100 index has returned on average about 6–7% per year. Hedge funds are much higher risk than typical investments, so they are expected to deliver greater returns to compensate for the higher risk. 2006 was one of the best years for the hedge fund industry. The CSFB Tremont Hedge Fund index delivered a gain of about 10% in 2006. Furthermore, £1000 invested in the FTSE 50 years ago would have turned into £24,426 in 2006. That’s a compounded annual growth rate of about 6.6%. Please note the number of years that took!

Now, compare these figures with the sort of return that you would need to get your £500 into £1 million. Such a move would require a gain of …wait for it…199900% !. Even £10,000 into £1 million would require an unbelievable gain of 9900%!

With all these in mind, if you find any free evening seminar guy who can prove that he has done this for himself at any point in his life, please call me asap. I will sell everything that I own and buy his training course immediately. In fact, I would give him all my money so he can trade on my behalf. AND I would gladly pay him 60% of profits since at such rates of return, I would still be onto a good thing! Bottom line is this: the free evening seminar guys are only really very good at one thing. In case you're wondering, it’s not trading. It’s selling seminars!


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Question: Dear Trader, someone they told me they have 42 indicators. Can these all be useful? Should I subscribe to level 2 data? [– Stefan]

Trader’s response: Hi again Stefan, by indicators I guess you mean those relating to technical analysis (as there are economic indicators too that have nothing to do with TA). Some indicators can indeed be useful depending on your time horizon and overall trading strategy. But most aren’t. Many of them are simply replicas of one another and I would not be surprised if those 42 are really only 5 once you look at the underlying mathematics and mechanics of how they work. Moreover, technical indicators are just that—indicators. They are not supposed to be panacea for all trading decisions. Used incorrectly, they could cost you a heck of a lot of money.

And, no, you don’t need any level 2 data. In fact, no small private spreadbetter needs real time data to be successful. I know a lot of people say otherwise but then again, most of them are selling such data!

[P.S: Please send in your questions to the 'Dear Trader' financial spread forum using the Dear Trader contact form. Thanks]



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