Spread Betting Trading Systems

Spread Betting Trading Systems

Browsing through investment websites and magazines from week to week I happen to stumble across many spread betting systems and methods taught and pushed by their proponents.

Of course, if you are thinking about spread trading, you should seek to gain an understanding of a few spread betting trading strategies and systems that will help you improve your chances to succeed. And in truth any sensible spread betting system that is reasonably researched, planned and tested will work.

A Financial Spread Betting System

“The average online stock market trader is a loser. Stock market trading is a game in which you cannot afford to be average. Thousands of new and inexperienced traders are being charged hundreds, even thousands of dollars by scam artists and self proclaimed experts for dubious spread betting systems and stock picking services or mechanical buy and sell signal generators. How can you take advantage of this lucrative environment without being taken in by mediocre advice?”

You won’t have been spread trading for very long before you start looking at spread betting trading systems. It is not enough to place spread bets on the basis of a gut feeling or a newspaper article, or even following a financial newsletter. You need to have your own system that is adapted to your likes and dislikes, your propensity for risk, and your trading pattern.

There are various ways that you can develop or acquire a trading system. Developing your own is usually preferable to acquiring one written by somebody else, because you understand more fully the reasons for the various rules and guidelines. However, you can shortcut some work by using and adapting a spread betting trading system developed by others. In any case a size fits all approach wouldn’t work because we all have slightly different needs. Having said that, while the techniques may differ, the basis of the framework of the system would be similar throughout. You can get some good ideas by studying the work of seasoned traders.

If you’re looking at an existing system, then you need to determine the statistics that apply to it and see how they will work with your objectives. For instance, one of the major statistics is rate of return, but equally important is the amount of drawdown that you may see, this is how far the account may go below its starting point during the bad times. You’ll often find that the highest rate of return is achieved by using high risk strategies that can also give big drawdowns. If the account subsequently recovers, then perhaps there is nothing wrong with it; but it can be psychologically very difficult to hang on using the system if the drawdown is too large.

However you start to put together your spreadbetting trading system, there are some important elements that you must incorporate. For instance, the system will depend on what financial instruments you are going to trade as markets can behave differently and you need to pick the most appropriate indicators and strategies.

Some systems that you can buy or subscribe to are designed to give you an unambiguous trading signal, but little other information. These systems are called blackbox trading systems, and if you choose to use one that you have to trust the designers and programmers who created it. Often these are trend following systems, which are some of the less risky strategies. However, if the system goes through a bad patch you have to decide whether you can stay spread betting with it without any real knowledge of why the trades are being placed.

The other problem with blackbox systems is that often they are based on the market at a particular time, and it is up to the programmers to modify the strategies when the market changes. In other words you and your money are in other people’s hands, and that may not be a situation that you are comfortable with.

However you go about choosing from spreadbetting trading systems, it important that you see for yourself that the system works, and therefore you should undertake to test your trading method. There are a number of ways to test a trading method.

  1. The first method of testing a trading system involves looking over the results of tests executed by other spread traders in publications or on the internet. This is better than trading blindly but in such instances you may not always know all the assumptions and parameters used during the testing which makes it difficult to measure the accuracy of the method or to make any tweaks.
  2. The second method is about back testing. Backtesting involves manually going back in time though vast amounts of historical data and establishing entry and exit points on a given system. This is effective and gives you some extra practice for your real trading. Also, when you do this, you make it much more likely that you’ll be able to stick with your system during the ups and downs of trading. The only downsides of back testing is that it can turn out to be a time consuming process and prong to limited subjectivity at times.
  3. The third method involves system testing. This is similar to backtesting – the only difference is that the process is automated. i.e. a software script executes the entries and exits based on pre-determined criteria.  System testing is preferred by some traders as it allows more flexibility; not only do you know exactly what the tests were based on but checking the results first hand strengthens your confidence in your trading method. System testing also helps to remove the human element of emotional trading meaning that your trading system must be 100% clearly defined.

To summarise, a good spread trading system should involve:

  • Research
  • Planning
  • Testing
  • Implementation

And lastly try to keep things simple – if support and resistance are what works for you then great…focus on that and forget the rest!

“If there were a simple automated system then someone would have found it by now. Remember, there is no magic black box spread betting system and the only way to know with a degree of certainty what the stock market will do is when the market has already done it. And look how many hedge funds went bust in 2008….so much for their complicated algorithms. A friend of mine does a lot of this stuff and he has a lot of ‘systems’ that work on backtesting but when you look at the equity curves you realise that they can’t be replicated in real time.”