Spread betting providers will always quote you a two way price in any market, a bid price and an offer price
Example: BP current quote is 563 – 564. You buy at 564 and sell at 563.
You buy or go long at the higher price, also called the offer price to open a new position. You would also buy at 564 to close an existing short position). You sell at the bid price or sell price (the lower of the two numbers) to go short or to close an existing long trade.
Making a spread trade is truly simple and easy.
Here are the steps:
- Pick which share, commodity, index etc. you want to trade and decide whether the price will go up or down.
- Go to your online spread trading company, and find out the bid‐ask price on the market you want to trade (we discuss the bid‐ask price in more detail in another section). A bid‐ask (sell/buy) price for a stock like NEXT may be 1211 ‐ 1213. You will decide whether NEXT’s price is going to go below 1211 in a certain amount of time, or whether it goes up over 1213.
A bid‐ask (sell/buy) price for a stock like NEXT may be 1211 ‐ 1213. You will decide whether NEXT’s price is going to go below 1211 in a certain amount of time, or whether it goes up over 1213.
If you think the stock will go down, below 1211, you sell.
If you think the stock will go up, above 1213, you buy.
The amount of time for the trade can be either very short term i.e. the trade is opened and closed during the same day (intraday trading) or it can be over a few days i.e. keeping the trade open and rolling over on a daily basis or it can be over a longer period e.g. quarterly which is based on the quarterly rolling expiry date. Whichever you choose the great thing is you can close your trade at any time. To use the above example: Let’s say the bid‐offer price for NEXT is 1211 ‐ 1213 on a daily rolling trade. If you bought it at the ‘offer’ price of 1213, thinking NEXT’s stock would go up, and half way through the week it hits 1230, you can close the trade, and lock in that profit right there and then.
- Decide on how big you want your trade to be. In spread trading you trade an amount ‘per point’ of movement of the share, commodity, index etc. Remember, we have covered this calculation in the section on money management. So let’s say you make a trade for £10 for every point NEXT goes up. Let’s say it hits 1230 as above and you close the trade at that price. It’s gone up 17 points, from 1213, where you bought it, up to 1230. 17points x £10per point = £170 profit for you. If the share rises to 1235, that’s a 22 point move and an £220 profit in your pocket. There’s no limit on how much you can make with each trade!
- But there’s also no limit on how much you can lose. That’s why it is vitally important that you place a stop‐loss. A stop‐loss will limit the amount you risk losing on each trade. You decide how much you’ll let the price of the share go against you before you lose too much. Again we have covered this in the chapter on Money Management so you know your risk before entering a trade. You don’t want to set the stop price too close to your entry price (your buy or sell price) as you need to allow for some movement in the share or else you’ll have little chance for it to quickly spring up back into a profit for you. Again, using the above example ‐ let’s say you make a trade and you buy NEXT with the spread still being 1211 ‐ 1213. So you buy NEXT at 1213 with a view that the share price will go up. Let’s say you place a stop‐loss order on your NEXT trade at 1193. If the stock goes down to 1193, 2 points from 1213, your trade will automatically close. If you had bet £10 a point, you will have lost £200. You now know the limit of what you stand to risk losing. That’s a lot better than if it had fallen to 1170 or further because then you would have lost £430 or more!
Again, you don’t want to put your stop‐loss too close to the spread, because a share or commodity is constantly moving and might dip down a couple points before it goes back up a lot of points, and you’d be stuck with that loss.
- When you’re ready to start trading, you need to open an account with the online spread trading company you are going to use to trade. Often a simple proof of ID and address is all that’s needed. We will discuss this in other chapters, as well as margin trading, where you can trade with very little money up front. This has a powerful effect on your returns and makes your trading money work much harder for you as your initial outlay for the trade is minimal.
And those are the basic steps to making easy money from home through spread trading.