Strategies for spreadbetting by Darren Winters
As more and more of our subscribers are turning to spread betting, we thought we should cover some simple mechanics that will enable you to trade more efficiently. The beauty with Spread betting is that it caters for a broad cross section of investors. You can start trading with as little as 50p per point or as much as £1000 a point depending on your capital and experience.
For those who have never spread bet before, you buy and sell in just the same way as you would with an online stockbroker. The difference is that you are betting on the future direction of a particular stock as opposed to actually buying or selling shares. You have to decide how much you want to bet per point of movement in the underlying share. So for example, let’s assume you were going to spread bet the FTSE 100 index which currently trades at 4,770 for £1 per point. If it moved up to 4,780 you would make £10 and the reverse if it moved down 10 points.
Now there are some elements of spread betting that are worth considering when investing using this platform.
PHASING PROFITS
We have always been advocates of ‘letting your winners run’ when trading in the markets and this can be done whilst spread betting too.
In order to do this, you need to place a minimum of £2 per point on a trade (assuming the spread bet firm’s minimum bet is £1). Now we would not recommend this strategy if you do not have a lot of funds in your account or are still building experience. The reason for this is that although £2 per point doesn’t sound like much, you only need to take a few losses at this level and you could be down a couple of hundred pounds.
Anyway, by placing a £2 bet on a stock or index, when it has moved into a healthy profit, you may want to take some money off the table. You can do this by selling just £1 of that bet. So for example, You bought the FTSE at 4700 and it moves up to 4760. So after the spread of 5 points, you are up 55 points or £110 on your £2 bet. In order to take some of the profit off the table, you place an order to sell £1 of the FTSE at the new market price, thus banking £55. You can then allow the remaining position to run further if it carries on moving up in price.
You can move your stop higher which will protect your remaining position but at least you don’t feel the pressure to have to bank some gains. Obviously, if you bet more than £2 per point, you could stagger your trade even more as you gradually realise profits.
KEY ENTRY LEVELS
If you, like us, want to see a stock move through a key level before entering a position, then utilising certain orders can be of great value.
For example, if you believe that the S&P 500 is getting close to a key resistance level, you may not want to buy unless it manages to break through it first. So you can use a ‘buy stop’ order to buy the S&P when it reaches a certain price. If it doesn’t manage to break through the resistance, your order doesn’t get filled and you cancel it.
Alternatively, let’s assume you think that if the S&P breaks through a key support level, then it will go much lower. So this time you would enter a ‘sell stop’ order to sell the S&P if it breaks below the support level.
This type of trading gives you plenty of time to undertake your technical analysis and identify key support and resistance levels. A classic example of this was when the S&P broke through the key 1131 resistance level at the beginning of November. It brought more buyers into the market which kept the price moving higher. Obviously you can get false breakouts but very often, a move through a significant level will bring about a continuation for a period in which a quick profit can be taken.
ADDING TO POSITIONS
We never advocate adding to a losing position in order to average down, but adding to a winning position is perfectly acceptable in our view. Let’s assume that you have entered a position which you are now up 50 or 100 points on. The stock is in a confirmed trend now and could still have much more to run. Well, you can add to your position in order to take advantage of further movement in the stock in the current direction.
If you had gone long on the stock, you would now simply place a new buy order at the current price in order to build your position (although you may want to wait for a pullback first). This will have the effect of increasing your average entry price so you will need to raise your stop in accordance with that. Now that you have added to the position, any further upside in the stock will give you even more profits. Bare in mind that you should not add any more than what your original bet was.
Alternatively, if you had sold short the stock and it had moved down 50 or 100 points in your favour, you would now add to the position by placing a sell order at the new lower price. Remember in this scenario to move your ‘buy stop’ lower.
These ideas are simple, but we utilise them in our own trading frequently in order to maximise our returns.
Darren Winters
For those who have never spread bet before, you buy and sell in just the same way as you would with an online stockbroker. The difference is that you are betting on the future direction of a particular stock as opposed to actually buying or selling shares. You have to decide how much you want to bet per point of movement in the underlying share. So for example, let’s assume you were going to spread bet the FTSE 100 index which currently trades at 4,770 for £1 per point. If it moved up to 4,780 you would make £10 and the reverse if it moved down 10 points.
Now there are some elements of spread betting that are worth considering when investing using this platform.
PHASING PROFITS
We have always been advocates of ‘letting your winners run’ when trading in the markets and this can be done whilst spread betting too.
In order to do this, you need to place a minimum of £2 per point on a trade (assuming the spread bet firm’s minimum bet is £1). Now we would not recommend this strategy if you do not have a lot of funds in your account or are still building experience. The reason for this is that although £2 per point doesn’t sound like much, you only need to take a few losses at this level and you could be down a couple of hundred pounds.
Anyway, by placing a £2 bet on a stock or index, when it has moved into a healthy profit, you may want to take some money off the table. You can do this by selling just £1 of that bet. So for example, You bought the FTSE at 4700 and it moves up to 4760. So after the spread of 5 points, you are up 55 points or £110 on your £2 bet. In order to take some of the profit off the table, you place an order to sell £1 of the FTSE at the new market price, thus banking £55. You can then allow the remaining position to run further if it carries on moving up in price.
You can move your stop higher which will protect your remaining position but at least you don’t feel the pressure to have to bank some gains. Obviously, if you bet more than £2 per point, you could stagger your trade even more as you gradually realise profits.
KEY ENTRY LEVELS
If you, like us, want to see a stock move through a key level before entering a position, then utilising certain orders can be of great value.
For example, if you believe that the S&P 500 is getting close to a key resistance level, you may not want to buy unless it manages to break through it first. So you can use a ‘buy stop’ order to buy the S&P when it reaches a certain price. If it doesn’t manage to break through the resistance, your order doesn’t get filled and you cancel it.
Alternatively, let’s assume you think that if the S&P breaks through a key support level, then it will go much lower. So this time you would enter a ‘sell stop’ order to sell the S&P if it breaks below the support level.
This type of trading gives you plenty of time to undertake your technical analysis and identify key support and resistance levels. A classic example of this was when the S&P broke through the key 1131 resistance level at the beginning of November. It brought more buyers into the market which kept the price moving higher. Obviously you can get false breakouts but very often, a move through a significant level will bring about a continuation for a period in which a quick profit can be taken.
ADDING TO POSITIONS
We never advocate adding to a losing position in order to average down, but adding to a winning position is perfectly acceptable in our view. Let’s assume that you have entered a position which you are now up 50 or 100 points on. The stock is in a confirmed trend now and could still have much more to run. Well, you can add to your position in order to take advantage of further movement in the stock in the current direction.
If you had gone long on the stock, you would now simply place a new buy order at the current price in order to build your position (although you may want to wait for a pullback first). This will have the effect of increasing your average entry price so you will need to raise your stop in accordance with that. Now that you have added to the position, any further upside in the stock will give you even more profits. Bare in mind that you should not add any more than what your original bet was.
Alternatively, if you had sold short the stock and it had moved down 50 or 100 points in your favour, you would now add to the position by placing a sell order at the new lower price. Remember in this scenario to move your ‘buy stop’ lower.
These ideas are simple, but we utilise them in our own trading frequently in order to maximise our returns.
Darren Winters
posted by Darren Winters at 12:43 PM
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