FxBrokerReviews.org – Spread betting enables speculators to make predictions about the course of a financial market or other activity without actually holding the underlying security; instead, they bet on how much it will change in price.
Spread betting employs a variety of tactics, including trend-following and news-based bets.
Other traders take several positions in mispriced markets and then bring them back into line to profit on rare arbitrage chances.
Wondering what is spread betting?
Spread betting is one of the various trading, hedging, or speculating options available in the financial markets, and it is popular with people who are skilled at seeing price movements and making money from speculation. It should be stated unequivocally that spread betting is currently prohibited in the United States.
Nevertheless, it’s still accepted and legal in certain European nations, including the United Kingdom. All examples used in the following tactics are thus all expressed in British pounds or GBP.
Although spread betting has great risks, it also has a large potential for reward. Zero taxes, enormous leverage, and broad bid-ask spreads are other benefits. If spread betting is permitted in your market, you might use some of the following tactics.
Spread betting around corporate actions
Spread betting might start up in response to corporate events. Consider the situation when a stock announces a dividend and the dividend then becomes payable (meaning to expire on the declared ex-date). Successful gamblers closely monitor the annual general meetings (AGM) of certain firms to gain a start on any prospective dividend announcements or other important corporate news.
Let’s say a business with shares now selling for £60 announces a dividend of £1. When the dividend is paid, in this example around £61, the share price starts to increase. Spread gamblers place their bets in anticipation of such jarring jumps before the announcement. Let’s take an example where a trader opens a long-bet position of 1,000 shares at £60 with a move of £5 per point. With the £1 price increase following the dividend announcement in our scenario, the trader gains.
Similar to this, gamblers will try to benefit from the ex-date of the dividend. Assume the stock price is £63 on the day before the ex-date. A trader may open a 1,000-share short position with a £10 spread bet per point. The share price normally decreases by the (now-expired) dividend sum of £1 when it goes ex the next day, arriving at roughly £62.
The trader will terminate the position by keeping the difference, or a profit of £10,000 in this instance:
£10,000 = (£1.00 x 1,000 shares x £10 per point).
Spread betting and stock trading is also combined by seasoned gamblers. By keeping the shares after the ex-date, they may, for example, also acquire a long position in it and get the cash dividend. They will be able to hedge between their two investments as a result, and they will also make a little profit from the dividend itself.
Spread betting tips that you need to know
- Learn about the benefits and drawbacks of spread betting, the most widely used leveraged trading product in the UK due to its benefits and drawbacks. Understanding spread betting’s tax efficiency and other benefits can therefore help it reach its full potential.
- Create a trading strategy: Trading without a strategy is similar to driving without a destination in mind. The chance of unexpected transactions can be decreased by using a trading strategy to help keep trades constant, disciplined, and scheduled. Visit our article on developing a trading strategy while spread betting for more details.
- Use risk management techniques: Your risk exposure can be controlled via the use of risk management conditions like take-profit and stop-loss orders. A solid trading plan and risk management guidelines offer a solid foundation for every trader’s approach improvement.
- Specify a single market: Though trading numerous markets results in much more trading chances, it is advisable for novices to concentrate their efforts on just one market. Because markets are intricate, trying to novices should concentrate leave you disoriented and even mistaken.
- Have discipline: One of the most crucial pieces of advice for spread betting traders of all levels is to strengthen their discipline. Trading based on emotions is frequently a trader’s largest mistake, hence it is important for traders to actively focus on how disciplined they are while entering and completing transactions.
- Adopt the mindset of a seasoned trader: Most seasoned traders will adhere to a reliable, repeatable plan. As a consequence, they can more precisely regulate unpredictable factors like dread and concern.
- Open a demo account to practise trading with £10,000 of fictitious money in a risk-free setting. Before using actual money, you may do this to refine your trading methods and track your progress.
Some spread betting strategies that you need to know
Along with the aforementioned advice, a number of tactics may be employed in an effort to boost the chance of trading success. It is important to keep in mind that this is only a partial list of spread betting methods; it does not include all of them. For more information on spread betting techniques, see our page on trading strategies.
Many traders ultimately modify or combine their trading methods with one another to fit their trading style. When spread betting, the following trading techniques are frequently employed:
- Trend following strategy
Traders who spread bets on trending markets utilise technical analysis to identify trends and only place transactions that move in the trend’s direction. Success in trend trading is frequently determined by an exact technique to follow and follow trends. Trend following is a medium-term approach. Since trend following is generally easy to learn but might take some practice to perfect, it is suitable for both novice and experienced traders.
Trend traders primarily evaluate the markets from a technical perspective and open and close transactions using charts and technical indicators. Traders place their own trend lines and utilise moving average indicators to determine a trend’s direction. Traders utilise indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) to determine when to begin and close spread bet positions (RSI).
Spread betting is an alternative for trend traders no matter which way the market is moving. They must be vigilant, though, as trends can alter suddenly owing to market reversals and other circumstances.
- News strategy For novice spread bettors, a news trading strategy might also be a smart one. The idea behind news trading is quite straightforward and may be practised as a pastime, despite the fact that it can be very challenging to perfect. Based on news releases, news traders join and leave the market and place spread bets before and after releases. Therefore, news traders must respond swiftly to gauge the market’s response to the news and decide which way they believe the market will move when the news is out. Spread betting strategies based on fundamental research are the foundation of news trading, therefore having a thorough grasp of international markets is crucial. Additionally, traders’ performance depends on their ability to comprehend news from the viewpoint of the market while being unbiased and free of personal prejudice.
- Using spread betting as a hedging tool Spread betting is a common hedging strategy used by traders. Traders can utilise spread betting, a tax-efficient trading strategy, to hedge holdings in their larger portfolios. When properly implemented, the method can effectively eliminate any market risk associated with holding shares. When employing spread betting as a hedging method, investors must take into account additional spread betting risks as well as expenses.
What are arbitrage opportunities?
Spread betting seldom offers arbitrage chances, although some illiquid products do. Let’s take the poorly tracked index as an example, which is now at 205. For the closing price, one spread-betting company is providing a bid-ask spread of 200–210, while another is providing a spread of 190–195. Therefore, a trader can use £20 per point to go short with the first business at 200 and along with the other at 195.
- In case one, the index closes at 215. While she gets 20 (215-195) in her long position, she loses 15 (200-215) in her short position.
- In case two, the index closes at 201. Her short position sees a loss of one (200-201) while her long position sees a gain of six (201-195).
- In case three, the index closes at 185. She increases her short position by 15 (200-185) while decreasing her long position by 10 (185-195).
As she earns five points at a cost of £20 each, she still makes a profit of £250 in each scenario. Such arbitrage possibilities, which are uncommon, rely on spread bettors seeing a price discrepancy across several spread betting companies and taking quick action before the spreads match.
What is a spread bet?
The amount you wish to stake per unit of change of the underlying market is known as the bet size. As long as it fulfils the minimum we accept for that market, you can pick your bet size. The difference between the market’s opening and closing prices, multiplied by the amount of your wager, determines your profit or loss.
We use points to represent the underlying market’s price changes. A point of movement may represent a pound, a penny, or even a tenth of a cent, depending on the market’s liquidity and volatility. On the deal ticket, you may learn what a point in your chosen market implies.
Your profit would be $120 (£2 x 60) if you placed a £2 per point wager on the FTSE 100 and it rose 60 points in your favour. You would lose £120 if it changed 60 points in the other person’s favour.
What is a bet duration?
The amount of time left until your position expires is known as the bet duration. Every spread bet has a set timeframe that might be anything from a day to several months in the future. If the spread bet is available for trade, you may close them whenever you choose before the specified expiry time.
Our spread bet time frames consist of:
- Daily funded bets: These bets have a default expiration date that is far in the future but can be extended as long as you like. Although they have the smallest spreads, they require overnight funding, therefore they are often only employed for short-term positions.
- Quarterly bets: These futures bets have a quarterly expiration date, however, they can be carried over to the following quarter if you notify us in advance. They are appropriate for longer-term speculation since they have bigger spreads but lower funding costs that are included in the pricing.
How to manage risks in spread betting?
Despite the danger involved in using large leverage, spread betting provides useful tools to reduce losses.
- Standard stop-loss orders: Stop-loss orders minimise risk by immediately terminating a losing transaction when the market crosses a predetermined price level. When a normal stop-loss is used, the order will close out your transaction at the best price when the predetermined stop value is achieved. Especially when the market is volatile, it is likely that your trade will be closed out at a worse level than the stop trigger.
- Guaranteed stop-loss orders: Regardless of the underlying market circumstances, this type of stop-loss order promises to close your trade at the precise value you have chosen. However, there is a cost associated with this type of insurance. Your broker often charges more for guaranteed stop-loss orders.
Using arbitrage, or betting in two different directions at once, is another technique to reduce risk.
With the introduction of electronic marketplaces, spread betting has effectively cut entry barriers and produced a huge and diverse alternative economy. Spread betting is continually becoming more sophisticated.
Particularly when two businesses provide different spreads on similar assets, arbitrage enables investors to profit from pricing differences between two marketplaces.
Spread betting continues to be plagued by the temptation and dangers of overleverage. Spread betting is an appealing prospect for speculators due to the minimum capital need, available risk control techniques, and tax advantages.
1. Is spread betting profitable?
Spread betting may provide income if the deal is profitable. Leverage allows you to expand your exposure to the financial markets, but it also magnifies your gains and losses relative to the complete value of your position, depending on whether the market swings in your favour or the other way. To practise trading, open a spread betting demo account right now.
2. How is the spread calculated?
The spread in spread betting is determined by comparing the quoted purchase and sell prices for an asset. Depending on the market’s volatility and liquidity, the bid-ask spread may change.
3. Is spread betting safe?
Customers that use spread betting must trade with leverage, increasing their exposure to the markets. If the markets move against you, your losses will be based on the whole transaction value, which might boost the possibility of profit if your trade swings in the desired direction. Although negative balance protection prevents you from losing more than the value of your account, this might completely wipe away all of the money in your account. Before you begin spread betting, it’s critical to understand the dangers and make sure you take preventative precautions, such as using risk-management tools like guaranteed stop-loss orders.