Developing a spread betting system
In this article, the term spread betting system does not refer to some black box computer programme that spits out trading instructions. In my long trading experience, I have found such trading systems to be most often a waste of time and money.
Here, I use the term ‘spread betting system’ to mean a complete toolkit or set of strategies for trading the financial markets. These strategies range from basic approaches used by new spread traders to more advanced trading techniques suitable for more experienced traders.
Introductory spread betting strategies
Some may wonder whether this is a strategy at all. But if you were a complete beginner, then you will surely like to know how even the basics work. Besides, even experienced pros can benefit from keeping things simple.
For those new to spread betting, ‘going long’ is simply market parlance for ‘buying’ or placing a buy bet. It goes without saying that you would only decide to go long a share, forex, index or whatever it is that you wish to buy, if you expect the price of the item or market to rise.
Spread betting strategies: ‘going long’ - example:
Consider a situation where the FTSE 100 index is trading at 6000 and the spread betting company is displaying the quote 5998–6002. If you expect prices to rise, then you can go long by buying at 6002. If you are correct and the index rises in price, then you will make profits on your trade. Of course, the reverse is also true!
Contrary to what you may have read elsewhere, going short is not quite the same as merely selling. Going short is ‘short selling’ and this is a very different strategy to simply selling to get rid of something that you previously bought! How?
Remember, as described above, to ‘go long’ means ‘to buy’. That is to say, your first transaction is a decision to buy something that you did not previously own. In the example above, a trader would go long if he expected the FTSE 100 index to rise. However, what if you do not currently have an open trading position on the FTSE 100 but you expect the index to fall over the next few minutes or days or weeks or months…?
Short selling was designed for just such a situation. When going short, you reverse the order of transactions. You start out by first selling and then you close the trade later by buying.
Spread betting strategies: ‘going short’ - example:
Consider a situation where the Dow Jones index is trading at 12152 and the spread betting company is displaying the quote 12150–12154. If you expect prices to fall, then you can go short by shorting at 12150. If you are correct and the index falls, then you will make profits on your trade. Again, the reverse is also true!
As you can see from the practical spread betting examples above, the process of going long and going short are pretty much identical. The only difference is that while your starting trade is a ‘buy bet’ for going long, you start out with a ‘sell bet’ if you’re going short.
Do spread betting strategies really need to be any more complicated than these?
Taken together, the basic techniques of going long and going short described above should form the core of any spread betting system. I rarely ever do anything else because these two strategies are more than sufficient to ensure consistent trading profits.
Now, you too could very well go about the rest of your spread betting career without ever doing anything other than going long (buying) and going short (short selling). And more often than not, you will find that your trading needs are well served by these two basic strategies alone. Afterall, winning at spread betting is about the effectiveness of your spread betting strategy and has nothing to do with the complexity of your spread betting system!
Nevertheless, once you've mastered the basics of financial spread betting, you will find that you can do a lot more than simple short and long bets. If you find yourself at that point, click on the links below for further spread betting strategies that you can explore.
Developing a more advanced spread betting system
Pairs trading seeks to take advantage of differences in performance between two similar stocks. Over the years, pairs trading has become a very common trading strategy for savvy traders. Click here to learn how to add this technique to your spread betting system.
Trading stock gaps:
Prices of stocks, forex, indices and commodities often jump sharply higher or lower. Quite often, this happens at the start of the trading day but it can happen at other times too. For savvy spread betters and traders, such price gaps can contain useful information that can be used to guide your subsequent spread betting strategy. Learn how to profit from trading stock gaps…
Market timing strategies:
As the old adage goes, "the trend is your friend". Once you have determined the direction of the trend, effective market timing tools will ensure that you enter the trade at the most opportune time for maximum profit. This article explains some simple and yet effective market timing strategies that will enhance your spread betting system.