Spread betting refers to a speculative trading approach that involves betting on the direction of the price movement of a security. The bid and offer price are quoted and the investor bets whether the price of the underlying asset will be lower than the bid or higher than the offer. With that, there is no ownership of the asset, which can be in the form of stocks, commodities, indices, and other financial products.With spread betting, investors can close the bet anytime and take home the profits or limit losses. Among the benefits of this strategy are low barriers to entry, access to a range of financial markets, and tax-free profits in several jurisdictions. However, as with financial trading, this still involves a lot of risks so here are some tips on how to use this strategy well.
1. Limit the markets you trade
Although spread betting does offer you plenty of choices in terms of underlying assets or securities to bet on, it can be overwhelming to keep tabs on all these markets at once, particularly when volatility is high. Besides, every type of market has its own factors that push prices around so it makes more sense to develop a deeper understanding for one rather than having your attention divided among too many.
2. Have a clear entry and exit strategy
Spread betting often involves watching quick short-term price movements and, more often than not, emotions such as fear and greed can get the best of you. To prevent yourself from reacting hastily or panicking, you should outline a clear trade strategy that qualifies the conditions for entering and exiting a trade. This can involve various technical indicators or candlestick patterns or a certain amount of points or pips in price movement.
3. Always use stop losses
In line with outlining your trade strategy, you should also incorporate a solid risk management plan. This is essential in keeping your account afloat and your trading confidence intact in the longer-run, as being able to stay in control of your maximum loss per trade or per day makes it easier for you to recover from a slump or a drawdown.
Besides, market forces are practically beyond your control and there’s always a chance of unforeseen events happening so it would help to have a way to make sure that your account doesn’t get wiped out instantly in these cases. Most spread betting companies actually require their clients to put stops in place before executing a trade anyway.
4. Calculate position sizes properly
Assuming you’ve identified your stop loss placement and your maximum risk per position, it is only then that you should calculate the right position size based on your account balance. This practice can also guide you when you are taking multiple setups at the same time and need to ensure that you are still staying within your risk management limits.
5. Take note of other costs involved
As with any business, there are other transactions fees that you need to be aware of since these ultimately impact your bottom line. Examples of these are trading commissions per position taken or the bid-offer spread that takes a portion of your earnings . These costs can add to your losses as well. It may also help to make certain adjustments to your position size to account for these additional costs.
Although most spread betters don’t really charge for commission, it’s the bid-offer spread that can dole out a lot of damage if left unchecked and if you take multiple short-term setups in a day. It’s therefore crucial that you select the right broker, one with tight spreads and one that doesn’t charge an arm and a leg for trading commissions. BrokerNotes is one useful site where you can compare which brokers are best and which ones you should avoid.