Spread Betting

There is a reason why many spread betting platforms feature clear warnings on their landing pages. It is one of the riskiest forms of technical trading. Spreadex.com warns visitors that 58% of retail investors will lose money on their platform when trading spread bets and CFDs. The sporting index kindly tells you that spread betting can result in losses greater than your initial deposit or credit limit. And these sites want you to trade!
Spread betting is a controversial trading style. Since 1920, it has been illegal in the United States. Still, with high risk comes high reward, and there are always traders with deep pockets, steely countenances, and an eye for an opportunity who can make it work.

What Is Spread Betting?

“Bet” is the operative word when it comes to spread betting. Although some might define it as a sophisticated derivative investment strategy, it is really just gambling. Hence, the ubiquitous warnings and disclaimers.

The Financial Conduct Authority (FCA) found that that 82% of spread bettors lost money on contracts for difference (CFDs), which are similar to spread bets. Traders spread bet for different reasons, but one is that the profits are not taxed. Profits from CFDs are.

Spread betting involves speculating on the future direction of a specified instrument, such as an individual stock or index, by making a directional bet with the spread betting company. The bettor chooses the security, decides on how much they want to bet, puts up a small percentage of the notional trade value as collateral (margin), and then profits or loses money depending on how the price of the underlying security moves.

Spread betting began in the United Kingdom in the 1970s as a way for individuals to speculate on the gold market, which was a difficult market to access at the time. Now, spread betting companies provide access to many other financial instruments like stocks, stock indices, interest rates, currencies, and commodities.

The bottom line is that even with substantial industry knowledge, spread betting is highly speculative and, potentially, perilous unless a spread bettor can see into the future.

The Pros and Cons of Spread Betting vs. Normal Trading

Spread betting, like all forms of trading has its advantages and disadvantages. For example, there are no commissions attached to spread betting, but brokers have plenty of other ways to ensure it is a profitable proposition for them. Here is a summary of the pros and cons of spread betting.

Pros

Margins – Spread betters can establish positions with a high margin—3% or less of the total transaction value in some cases.

Limits – Bettors are not limited by minimum transaction sizes. A spread bettor could make a bet on a stock with £100 or less.

Commissions – There are no commissions, but bettors have to pay the entry spread (buying at the ask and selling at the bid) determined by the spread betting company.

Taxes –In the United Kingdom, profits from spread betting are not subject to capital gains taxes or stamp duties.

Access to markets – Bettors can access markets that otherwise would have minimum investment requirements, such as futures contracts.

Cons

Margins—High margins can lead to significant losses.

Asset Ownership—Bettors never own the underlying asset and can be forced out of a position because of holding costs and margin requirements resulting in losses.

Fees—Bettors must pay the entry spread, buying at the ask price and selling at the bid price. They must also pay financing charges if they hold a position overnight. Some brokers charge fees on funding, withdrawals, and inactivity.

Margin Calls—If a spread bet moves against the bettor they may face a margin call if their account equity falls below a certain threshold.

Wide Spreads—Bid-ask spreads are set by the spread betting companies who make money off artificially-widened spreads.

How Do You Perform Spread Betting?

Bettors apply various technical trading strategies to spread betting, such as trend following, trend reversal, breakout trading, and momentum trading. Knowledge in these areas will help you in other types of trading too.

Educate Yourself About the Basics

You do not have to sit in a classroom to learn technical trading techniques. There is a way to learn whatever your preferred learning style.

You do not have to sit in a classroom to learn technical trading techniques. There is a way to learn whatever your preferred learning style.

Books

“Trade What You See: How to Profit from Pattern Recognition,” by Larry Pesavento and Leslie Jouvlas is our recommendationat The Lazy Trader. Other recommended books are “Making Money From Financial Spread Trading” by Vince Stanzione (DVD included); The Financial Spread Betting Handbook; Winning Spread Betting Strategies, and, 7 Charting Tools for Spread Betting, all three by Malcolm Pryor, and Naked Traders Guide to Spread Betting by Robbie Burns.

Spread Betting Courses

Be wary when it comes to trading courses, particularly if they are run by independent education companies that claim to be free. They will most likely try to lock you in a room and upsell you. That said, The Good Money Guide recommends three options. The Chart Seminar is a two-day seminar hosted by Eoin Treacy from Fuller Treacy Money.

Second, attend a seminar held by your broker because your broker has a vested interest in your becoming a better trader. The IG platform runs free seminars for clients who deposit over £1,000. Third, check out a qualification from the Society of Technical Analysts (STA) and get credentialed as a spread bettor.

Blogs

Many of the spread betting platforms have their own blogs. Two blogs recommended by Feedspot.com are LS Trader Blog | Financial Spread Betting System and InterTrader Blog | Spread Betting UK, CFD Trading, Financial Spread Betting.

The LS Trader blog gives weekly market updates and discusses trends in the financial markets. InterTrader provides market-neutral spread betting on shares, indices, Forex, commodities, and other trading vehicles.

Forums

Do a Google search for spread betting forums, and you will find plenty of discussion. Two examples of forums are Babypips and the IG Community. While forums are great for bouncing ideas and questions off other bettors, you have no way of knowing who is an authority on the finer points of technical analysis, so be discerning when following advice.

Newsletters

Many trading providers also offer newsletters, and many are free. The Armchair Trader sends out a daily newsletter with stock picks on UK and international shares, currencies, commodities, and alternative investments.

Podcasts

Podcasts on spread betting are easy to find. Try Canny Trader by Jeff; The Spreadbet Beginner Podcast by Chris Chillingworth; and The Artful Trader by CMC Markets.

YouTube

You will find plenty of scammers and fake gurus on YouTube. With something as sophisticated as spread betting, you might not want to waste your time unless an influencer comes highly recommended from a trusted source. Avail yourself of this free resource; just be sure to consult more credible sources.

Webinars

Webinars can pull you in as a marketing ploy. Research the webinar provider before committing time or money. A safer choice is to pay for an educational course from a reliable broker who has a genuine eye for the long-term success of your e-portfolio, not just the near-term contents of your e-wallet.

Establish Whether Spread Betting Is for You

There are many ways to invest and trade, so it is wise to choose an approach that suits your risk profile, bandwidth for losses, and trading style. Ask yourself if spread betting is really for you.

The danger in spread betting is that it is a highly leveraged product. Bettors borrow money to make large bets that they may not be able to afford. If the market moves against them, their losses are compounded. For example, a bettor might take a £30,000 position with a £100 deposit, which is a leverage of 300 times.

Bottom line. If you like to take risks, are an adrenaline junky, and have command over your emotions, you will enjoy spread betting. But there is one overriding problem, as the FCA found, only 20% of betters will make money. So you see the odds, and if you do not, you have no business spread betting.

What Do You Have to Be Prepared to Do?

The best way to learn spread betting is through experience, and that takes time. Also, be prepared for high maintenance margins. Most U.K. spread betting firms require that investors must maintain an equity value of 80% or more of the initial margin.

Spread betting accounts will also have a pre-specified margin closeout level. The broker will close out open positions if the equity value of the account falls below a certain level. The minimum close out level for U.K. brokers is 50 percent.

Spread betting requires focus. You will need to research financial instruments to trade. You should follow an entry and exit strategy and use stop-loss orders.

Be prepared for a learning curve. Experts suggest a timeline of years rather than months to learn charting and technical analysis and master the emotional and psychological aspects of spread betting.

Manage Your Expectations

As a spread bettor, be prepared to lose money in the short term as you gain experience. Take a slow but steady approach, and learn from your trading mistakes.

Risk Management

Remember the golden rule for trading. Never trade any more than 1-2% of your trading account value per trade. A small position size gives you a margin of safety. Other ways to mitigate risk are to use standard stop-loss orders that automatically close out a losing trade once a market passes a set price level. A standard stop-loss will ensure that your trade will be closed out at the best available price once the set stop value has been reached, which will be a boon if the market is volatile.

Arbitrage is another way to mitigate risk. When the price of identical financial instruments vary in different markets or among different companies, the instrument can be bought low and sold high simultaneously.

Select a Proven Strategy With Objective Rules for Entry & Exit

Spread bettors use different strategies. Most use some form of technical analysis such as trend following, trend reversal, breakout trading, and momentum trading. Others rely on corporate news and try to read into activity like stock dividend announcements and news from annual general meetings. Many traders use a combination of both.

Whatever strategy you use, set rules that you will stick to. Changing strategies will delay the learning process. Set achievable targets within a generous timeframe. Journal your activity, review it, and make adjustments only after you have allowed sufficient time for your strategy to work.

Which Trading Platform is Best for Spread Betting and to have a Demo Account with?

Some trading platforms are better for novice spread bettors because they provide customer support, a demo account and useful educational materials. Here’s a list of the best brokers for beginners.

IG

IG is a well-designed and user-friendly web trading platform and app. It has options for charting for technical analysis, and you can call or email customer service if you have questions. The platform educational content is ahead of its rivals and is diligent about explaining the risks of spread betting. It is one of the market leaders in the UK, as a result it offers increased liquidity in the instruments it makes available to trade.

City Index

City index offers tight, fixed spreads, including Short Sterling, Eurodollar, and Euribor futures. The platform allows trading on over 8,000 markets—global FX, indices, shares, and more. The platform shows the latest news and educational content. They were established nearly 40 years, one of the oldest spread betting firms out there.

Markets.com

Markets.com offers spread bets on thousands of instruments across Forex, commodities, currencies and stocks in global markets. The platform offers phone support and live chat, and it has a knowledge center with extensive educational materials and the latest market news. Its charting tool is not as strong as its rivals. It is one of the easiest platforms to use though.

Pepperstone

Pepperstone gives access to the MT4, MT5, and cTrader platforms. It has competitive spreads and FCA-regulated brokers processing an average of more than $12 billion per day. Great customer support is complemented with educational resources and expert webinars. Pepperstone has a focus on CFD trading, ideal for those wishing to focus in this area.

FXCM

FXCM claims multiple platforms and mobile apps, smaller bet sizes (from 7p a point), and award-winning customer support via email, live chat, and phone. It has been around for some time and offers a good all-round service. It’s geographical reach is larger than many which could be attractive for readers in far flung places.

Keep a Trade Journal of the Trades You Take

The best way to learn spread betting is through experience. But you will forget what moves you made when unless you record them. A journal can help you analyze what you did, why, and what you should do in the future. Take screenshots of your moves and note why you made them and what you were feeling. The goal is to correct past mistakes and build upon prior trading successes.

What Are the Risks of Spread Betting?

The IG Index platform cites the following warning, “66% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.” So, what exactly is it that makes spread betting so risky?

Spread Betting Is Highly Leveraged

Spread betters only deposit a small percentage of the full value of a trade, and they never own the underlying assets. While they could profit greatly if the market moves in their favor, they also stand to lose a lot more than they bargained for. For example, for a trade worth £5,000 with a margin rate of 5%, you only need to pay a position margin? of £250 to open the spread bet position.

If, however, the price of the instrument moves against you by 10%, you lose £500 – double your initial stake in the spread bet. This is because your exposure? to the market (or your risk) is the same as if you had purchased £5,000 worth of physical shares. Retail client accounts have negative balance protection, so the losses will be limited to the value of the funds in the account, but bettors could lose it all.

Account Close-Out

Market volatility outside of normal business hours can cause rapid changes in price, particularly in international markets. If bettors do not have sufficient funds in their account, the platform might close their positions automatically when the account balance falls below the close-out level.

Gapping and Market Volatility

In volatile markets, prices can move from one level to another jumping through a level in between. This is called gapping, or slippage. When gapping occurs, a stop loss order may be executed at a worse level than requested, exacerbating losses if the market moves against the bettor. Guaranteed stop-loss orders are one way to protect trades against gapping.

Holding Costs

Commissions are not usually charged on spread betting, but holding costs are incurred on a daily basis for positions kept overnight on certain instruments. If kept for a long time, the sum of these holding costs can exceed the amount of any profits made on the position or they could significantly increase losses.

Overtrading

Some platforms offer bonuses to novice spread bettors for opening accounts, but they are often not in the best interests of new entrants. For example, a bonus offer requires the spread bettor to trade a certain number of lots in a fixed time frame, which can lead to overtrading. According to the Good Money Guide, regulators like the FCA are trying to crack down on these incentives.

What Are Typical Characteristics of the Successful Trader Who Uses Spread Betting?

I would like to say rich and fearless, but that might be simplifying things. A successful spread better is aware of the risks, yet uses technical analyses among other techniques to set a strategy that they stick to. They understand how their emotions sway them and learn to manage those behaviors.

Spread bettors also use money management so that they do not risk too much of their pot, and use the right timescale for the type of trade. For example, if a bettor takes a six-month view, it can take time to see profit. During that time, the trader might lose confidence or exit trades prematurely.

Successful traders realize that it is up to them whether they win or lose. If they decide to follow the advice of someone else and it does not work out, they only have themselves to blame.

8 Pro Tips for Successfully Spread Betting

No-one is a natural when it comes to spread betting. Set yourself up for success by reading books, listening to reliable podcasts, opening a demo account, and learning as much as you can before you start to trade. The more you know, the better you will perform.

1. Educate Yourself

No-one is a natural when it comes to spread betting. Set yourself up for success by reading books, listening to reliable podcasts, opening a demo account, and learning as much as you can before you start to trade. The more you know, the better you will perform.

2. Treat Spread Betting as the Expensive Hobby That it Is

Use spread betting as a pastime that you can afford. Stick to a proven strategy with stop-loss orders to cut your losses short and let your profits run.

3. Know When Not to Spread Bet

Don’t spread bet if you haven’t prepared a set plan. Have patience, and wait for the right trading opportunity.

4. Use the Best Time Frames

Longer term spread betting, such as rolling dailies or futures, are better for novice traders. Intraday trading is hard enough without adding more complexity. Factor in overnight charges for rolling dailies.

5. Manage the Risk

Abide by the golden rule and do not trade more than 1-2% of your trading account value per trade. Use standard stop-loss orders and arbitrage to balance out wins and losses.

6. Trade with a Regulated Firm

Regulated firms operate under the guidelines of the FCA so that your money is protected.

7. Be Stubborn and Persistent

Take a slow but steady approach. Experts say it will take a year to learn the ropes and be profitable. Do not rush, and learn from your mistakes.

8. Keep a Journal

Did you keep to your trading plan? Keeping a journal is the only way to know just how steely a trader you are.

Is Spread Betting Profitable?

Spread betting can be extremely profitable for the patient trader who has discipline and money to burn. For those who weaken when the markets change or who do not stick to their plan, it will be a humbling experience.

How Can I Start Spread Betting

Follow this guide as a novice. Educate yourself and open a demo account. So many traders lose money, but a demo account can give you an idea of the challenges of spread betting so that you can decide whether it is a good way to trade for you. Use stop losses to manage your risk. Lastly, we will not repeat the golden rule, but you should follow it.

Spread Betting: General Terminology

Exit strategy

Success at spread betting requires cutting your losses early and running your profits before selling them. Carefully considered entry and exit points are critical. Novice spread bettors tend to focus too much on their entry point and not at all on their exit, which is just as crucial. Consider the risk-reward ratio when setting price targets.

Demo account

Demo accounts are a unique learning opportunity. You can practice trades, study charts, and generally play around without any risk to your wallet. However, they can also give you a false sense of security. Demo accounts only cover some situations and do not prepare spread bettors for all real situations.

Stop-loss

Use a stop-loss as an exit strategy. The trader automatically exits a trade at a pre-determined level that is less favorable than the current market price. The level is lower than the price at which the trader entered the market for long positions and higher for short positions.

Gapped Out

Prices can jump from one price level to the next and miss a level in between. This can happen after major news, geopolitical risk, world events, or economic forces. If the market gaps, a trader might find their trade closed out at a level that is different from their trigger value resulting in a greater loss that the original requested stop.

Charts

Charts are used by traders for technical analysis to show trends. Traders use charts to predict the likely outcomes of trades. Technical analysis with charts can help traders to ignore their emotions and to stick to their trading strategies. Technical analysis and charting studies price action and behavior. Trades are based only on historical data. Charts cover timeframes of minutes to intraday to years.

Opening Bell

The trading session on the New York Stock Exchange (NYSE) is announced with the opening bell at 9:30 a.m. Eastern time. It is a physical bell with an automated ringer. In 1986, the tradition of a bell marking the beginning of the trading day on London Stock Exchange’s trading floor ended with the deregulation of the market and dissolution of the trading floor. In 2011, the London Stock Exchange revived the tradition.

Bid-Ask Spread

The bid-ask spread is the difference between the bid price and the ask price. A small spread indicates a high volume of active trades. A large spread indicates low volume and few active trades. Small spreads mean that traders are more likely to get their orders filled at their desired price.

Bar Chart

Bar charts are probably the most commonly used chart by traders. The daily bar chart represents each day with a vertical bar from the low price to the high price. The opening price is a horizontal line called a tic on the left of the bar. The daily closing price is a tic leaving the bar to the right. Bar charts contain more information than simple line charts. While line charts show only the closing prices, bar charts show opening and closing prices and the high and low prices for each period.

Breakouts

A breakout is when a price pushes beyond a previously limiting price level. Breakout trading identifies a price level you expect the price to break through, and then the trader buys or sells at that price. Breakouts are often used when the market is near a recent extreme high or low. Prices are less limited in breakout trading.

Risk Reward Ratio

The risk reward ratio indicates how much you stand to win or lose. For example, a risk reward ratio 1:1 means that a bettor could only win back their risk, and they need far more winners to profit. With a more favorable ratio of 1:3, the bettor is willing to risk one dollar to win three. A ratio above 1:3 is considered meaningful.

Technical Indicators

Technical trading involves the interpretation of technical indicators. These include trend indicators, momentum indicators, volatility indicators, and volume indicators. Trend indicators include:

• Moving Average Convergence Divergence (MACD)
• Parabolic SAR, ADX, and Simple and Exponential Moving Averages

Momentum indicators include:

• Relative Strength Index (RSI), Commodity Channel Index (CCI)
• Stochastics

Volatility Indicators include:

• Average True Range (ATR)
• Standard Deviation
• Bollinger Bands

Volume Indicators include:

• Rate of Change (ROC)
• Chaikin Oscillator

• On Balance Volume.

Momentum

These indicators measure the rate at which prices change over time. Momentum indicators can be the precursor to new changes in trend. Traders who recognize a trend before it fully develops can see significant profits from buy and hold strategies or sell and hold strategies. Trading on momentum is more suited to longer time frames, which are less erratic than shorter time frames.

Trend Trading

Trend following or trend trading strategies are buy and hold strategies. They involve holding a market position for an extended period of time. This strategy is based on daily or weekly charts. Beginner traders and advanced traders use this approach based on indicators such as the moving average convergence divergence (MACD) and the relative strength index (RSI).

Conclusion

Spread betting is extremely high risk. Those who are successful tend to be sophisticated investors who only allocate a small percentage of their vast net worth to hedge their portfolio. For everybody else, losses can be financially devastating because trades are highly leveraged.

The best way to learn spread betting is slowly and through experience. While climbing the learning curve, manage risk by only trading what you can afford to lose—because you will lose initially—setting stop-loss orders, and use arbitrage to profit from the difference in bid-offer spreads. Those same rules apply even when you become more accomplished because the risks of spread betting do not diminish over time, they are omnipresent.

Frequently asked questions (FAQs)

Can you teach yourself how to spread bet?

Yes. You can teach yourself to spread bet, but pay attention to the quality of sources you use. There are plenty of fake gurus offering webinars at a cost or even for free to upsell you. Use reputable books, podcasts, websites, and participate on forums. When it comes to chatter, be discerning. Remember that the best way to learn is through experience and journaling.

What asset should I be spread betting on?

You can spread bet on foreign stocks, global indices, commodities, currency pairs, and bonds. Lower risk assets are a good choice as you find your feet. You will lose less money this way.

What are the weaknesses to using spread betting?

Simply put, spread betting is high risk, and most bettors fail. Because bets are highly leveraged, losses can be sudden and unlimited, particularly with no stop loss position. Losses cannot be set against an investor’s capital gains on other investments as with share purchases. Because bettors do not own the assets at any point, they have no shareholder rights or rights to dividends.

Can I start spread betting with $100?

As far as the amount to trade is concerned, you can trade with as little as $100, but even with consistent profits, the amount that you will gain is unlikely to be worth the time you spend learning and trading.

How risky is spread betting?

Few traders divulge their real numbers, so it is not easy to measure risk particularly for spread betting. Perhaps the best indicator of the risk is the number of trading platforms that post disclaimers. For example, Spreadex.com warns visitors that 58% of retail investors lose money on their platform when trading spread bets and CFDs. Heed the warnings!