Spread Trading Tips

If you follow these spread trading tips, then you will increase your chances and wind up with a bigger profit. First of all, you must be aware that not all markets are created equal. When you looked for a spread betting provider one of the items on your checklist was that the spread should be low, perhaps as low as one point on the major indices. But having got the best spread you can in each market still does not mean that each market is equally worth betting in.

  1. Stick to the markets your are familiar with. I deal in UK shares but stick to blue chip stocks since these are highly liquid. With regards to indices I only trade the FTSE, Dax, Dow or S&P 500 while on currencies I tend to focus on cable and the euro dollar. When looking at commodities gold and oil are my favourites.
  2. The key to being successful is to deal in a trade size where you are comfortable with the exposure and able to sleep at night or walk away from the screen. Many spreadbetters don’t trade on a full-time basis but also have a demanding 9 to 5 daily job. This means that it is especially important to be comfortable with the potential downside should the market move against your trades.
  3. Have strict risk-reward trading rules and stick to them. The amount you put at risk per trade has also to depend on whether you are trading a volatile market. For instance, you can put a bigger amount at risk on a FTSE 100 index trade compared to a crude oil trade as the FTSE is less volatile (while for oil you need to have larger stops due to the higher volatility which implies a lower stake to have the same amount at risk)
  4. It is also a good idea of start small and build up progressively as gain experience and have a good trading system in place. It is prudent to quantify a ‘worst-case’ scenario’ (with stops) and be willing to risk this amount.
  5. Be patient, never trade on impulse. If you find that you are earnestly looking for an entry point in the market because you think you are missing out on opportunities, this is usually a good sign to stay out!
  6. You also need to run your profits, especially if you don’t have a clear target in mind. For instance, at the beginning of this year, I thought the EUR would decrease in value and when it broke the 1.40 support level against the dollar I placed a small down bet. Initially, the market moved in a favourable direction but I was ready to risk a couple of hundred points if I was wrong and I had a target profit of 500+ points if the spreadbet performed well. The market hovered between the 1.40 and 1.35 levels for the next couple of months and I left the position open. At last, in May, the EUR took another plunge and I close my spread bet at 1.27 and I ended making 1,300 points.

As a beginner, you would be well advised to stick with the major spread bets, such as the FTSE 100, where the spread is low and therefore you can rapidly turn your opening position into profit. As a general guideline, this is a good way to start out. You’ll note that the spreads are wider on some other markets such as individual shares. This does not automatically mean that it’s “better” to trade on the indices. When you get experienced in reading the markets, you will appreciate that volatile prices equate to wider spreads but can also give you more profit. To gain an edge, see if you can relate each market’s volatility to the spread offered, and determine what would give you the best percentages.

Another good way to improve is to keep a spread trading journal or trading diary. Although this can be on-screen using a simple program such as Notepad, it seems to have more value if it is an actual notebook which you can write in. You should developed the habit of logging every spread bet you place, including why you decided on this one, the size of the trade, how you set a stop loss, and your anticipated profits. Record the actual price levels you get from your broker, and whether you win or lose.

Set aside a time, perhaps once a week, to go through your journal and see what worked and what didn’t. Note down the times of your trades – are your winners or losers following a pattern? You might find that you do better in one market than another, or that you do better in the morning and not so well in the afternoon. A trading journal is incredibly useful to chart your progress as you become more experienced and have more success, and the feedback that you give yourself will accelerate that process. Trading is a skill that takes time and initially it is likely to cost you money.

Before you start spread trading in earnest, be sure that you have a clear plan of action and that you have tested its profitability by paper trading. Many brokers offer a demo account, and you should treat this as seriously as an account with your money when you practice trading. It gives you the opportunity to try out various ideas without losing money, and so is invaluable while you are developing your trading strategy. Make sure you write down your trading plan so that, when you come to analyse it later, you’ll know just why you felt it was telling you to make the moves you did; and keep a trading journal even with a demo account, so that you can develop good trading habits.