Spreadbetting Explained

Discussion in 'Spread Betting' started by Maverick, Apr 21, 2016.

  1. Maverick

    Maverick Master Trader

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    By Tim Bennett @ Moneyweek with input from Maverick

    Let’s be upfront here . . .

    Spreadbetting IS risky - It’s high octane and it’s NOT for widows and orphans.

    But say you have a hunch that the euro is on the verge of collapse. Or that the Japanese stock market will beat the US market this year. Or that the banking sector is long over due another crisis.

    Spreadbetting is one of the easiest and cheapest ways for a private investor to back their hunches with hard cash. And if you call the market right, you can make BIG profits, very rapidly BUT YOU COULD lose it ALL even quicker IF the market turns :(

    What is Spreadbetting?


    Spreadbetting simply allows you to speculate on whether the price of an asset will rise or fall. You can gamble on everything from shares and commodities to stock market indices and house prices.

    The beauty is that you don’t actually have to buy the underlying asset you want to trade. You just take a view on the prices offered by the spreadbetting provider as to whether the price will rise or fall.

    How Spreadbetting works

    Spreadbetting firms offer you a quote, which consists of a bid (selling) price and – slightly higher – offer (buying) price. Take the following example. If the FTSE 100 stands at 4700, the spreadbetting provider will likely offer you a bid price of 4698 and an offer price of 4702.

    If you think that the index will rise, you might “buy” for £10/point at 4702. For each point the FTSE 100 rises, you will earn £10. Say the FTSE rises to 4722 by the day’s close, and you decide to close out your bet. Your profit will be £200 (4722-4702 = 20 x £10). In contrast, if you think the market will fall, you “sell” at 4698.

    But there are risks as well as rewards in spreadbetting. Although you can make a lot of money from wagering a small stake, you can lose money fast, too. So if you sell the FTSE 100 for £10/point at 4698, and it actually rises to a spread of 4720/4724, you lose £260 (4698-4724 = -26 x £10).

    Because you can quickly lose lots if your trade goes wrong, spreadbetting firms demand some protection that you’ll eventually be able to settle up. This is a deposit called ‘margin’. It varies in size, but is usually around 10% of the value of your bet. If your losses on the trade threaten to exceed that margin, your provider will demand more money, known as a margin call. If you can’t come up with this, the provider will close out your position at the current price.

    You’ll go broke quite fast if you depend on margin calls to control your losses. So a much better way is to use stop losses. These are orders to close out a trade at your specified level. In the above example, if you sold at 4698 but set a stop loss at an offer price of 4710, your loss would be just £120 (4698-4710 = -12 x £10).

    There is a potential problem with ordinary stop losses however – “gapping”. That’s where the market is moving fast and lots of stop-loss orders are triggered together. Since they close at the market price closest to the specified price on a first-come, first-served basis, you may not get out at the level you expected.

    The solution to this problem is slightly more expensive but well worth considering – the guaranteed stop. Here you pay your broker a slightly wider spread to get you out at a preset price regardless of how many other stop orders are triggered alongside yours. In effect your broker is buying you out of the trade. At times of high volatility in particular, that’s insurance that’s well worth paying for.

    What are the advantages of Spreadbetting ?

    One reason is the tax break. Under UK law, there are NO taxes on your betting profits, either stamp duty or on capital gains :) Another is that it can be an easy and cost effective way to trade. When you buy shares through a broker, you have to pay a fee. With spreadbetting you don’t. This is because the spreadbetting provider makes his money from the difference between the bid and offer prices.

    But it’s not just about cost. Spreadbetting lets you speculate on a whole range of markets that would otherwise be difficult to access. For example, as well as betting on currencies and shares, you can bet on how many seats a political party will win in a general election, or how many runs a cricket team will score in its innings.

    MoneyWeek Trader is a FREE spreadbetting & trading email offering you the very best tips, secrets and guidance from our trading expert, John Burford, who has years of first-hand experience.

    CLICK TO SUBSCRIBE TO MONEYWEEK TRADER
     
  2. Maverick

    Maverick Master Trader

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    Always, always, always have a STOP LOSS in place and DON'T be greedy - By all means trail the SL BUT never move it backwards
     
  3. Maverick

    Maverick Master Trader

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    So how does the Chancellor of the Exchequer (Tax Man) make their money out of Spreadbetting ?

    Every bet you place Win or Lose you HAVE to pay the Spread first - the brokers cut - who builds in HIS tax liability.

    Gordon Brown was very astute when he came up with the idea - Why ? - because there are a lot more losers than there are winners !

    Before you ONLY paid tax on your winnings
     
  4. Andy

    Andy Master Trader

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    So how demanding is spread betting in terms of screen time and focused concentration?

    Would a common successful spread betting approach be better described as very short-term scalping? or can you take a longer-term trend following type approach to it?
     
  5. Maverick

    Maverick Master Trader

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    . . . It's what ever you want to make it - at any given time of the day or night (5 day week) you should be able to find a 20 pip trade somewhere - 20 pips/day could give you £2,000/day TAX FREE

    You are also not limited to currencies and can basically bet on anything that moves. My personal favourite at the moment is the DAX (germany30) with an ADR of around 200 and a spread of only 1.0

    Or there is Apple Computers (AAPL) steadily going up and up but with a spread of 12.0

    Gold is another good bet with an ADR around 200 and a spread of 5.0

    Gold.png

    How many times can you count 4 bricks of the same colour going in the same direction ?

    The secret is knowing when to stop - it can be like shooting ducks in a barrel - all you can see is £££££ then greed takes over - you keep going and lose the bloody lot :( I would make a lot more IF i only had an hour computer time - C'est la vie

    Which is why I started this forum . . . To convince myself what i should and shouldn't be doing . . . all very well saying go and play with a demo account once I have my 20 . . . All you can see is £££££ and before you know it you are back on the live account - SHoneT !

    Big TF's would for me be like betting on the round the world yacht race (which you can) so much could go wrong. Which is why I like my 5 brick Renko Charts. Four bricks in the same direction and I SHOULD be done for the day. Try telling my mouse that !

    It's a lot easier to make 20 * 100 than 100 * 20


    Spreads mentioned are with my GKFX broker and times are chart times (GMT +2)
     
  6. Maverick

    Maverick Master Trader

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    There was a 4 brick movement as soon as the market opened - Take the day off :)
     
  7. Andy

    Andy Master Trader

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    Hmm interesting.

    I'm too far along on my own journey to begin a new one, maybe a few years ago I might have tried it but it's always fascinating to learn about new systems, approaches and financial products.
    Keep it up and I wish you all the best.

    Onwards to a £1,000,000 and beyond, and may the tax man be none the wiser!
     
  8. Maverick

    Maverick Master Trader

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    And always looking over your shoulder - Remember how they took down Al Capone ?

    . . . Non payment of taxes
     
  9. Andy

    Andy Master Trader

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    Ha, governments, they are the masters of organised crime.
     
  10. Maverick

    Maverick Master Trader

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    YOU shouldn't have been in that position in the first place if you had your SL in the right place at 4703 (- 5 points = £50 = 5% loss)

    On the understanding that you would have needed a £1,000 account to have had enough margin to place a £10 bet

    Your next bet will then be £9.50 which should make you £190 based on 20 pips

    Next bet 950 + 190 = 1,140 = £11.40 bet @ 1%

    11.40 * 20 = £228

    Giving you a pot of £1,368 = £13.68 bet @1%

    etc, etc, etc

    at this rate you could be drawing £2,000 a day in 17 days !!!
     
  11. Enivid

    Enivid Administrator Staff Member

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    It is the same as spot Forex trading in terms of required time and dedication. You can be a long-term trader in spread betting too.
     
  12. Maverick

    Maverick Master Trader

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  13. Maverick

    Maverick Master Trader

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    I went looking for the same data from ETX Capital but found this instead . . . will email them for possible data sheet.

    Spread Betting with ETX Capital

    One of the advantages of spread-betting in the UK is that profits are tax-free. Since spread betting is currently considered to be a form of gambling by HMRC, NO Capital Gains Tax is due on proceeds. This means that if you win you get to keep 100% of your profits, untaxed.

    However, losses cannot be used to offset taxes.

    Spread betting vs standard trading

    Though spread betting is a form of trading, there are a number of differences between spread betting and more traditional forms of trading. The main one being – spread betting profits are TAX FREE, whilst profits made from regular trading are not.

    However, there are further contrasts which serve to differentiate spread betting from other types of trading, such as the concept of leverage. Essentially, leverage, also known as margin, means that spread betters have the ability to place large trades with an initial stake which is only a fraction of the value of the actual position. This is different to traditional trading, where the sum total of the trade equals the amount staked on the trade.

    Since the initial sum put in is smaller, if the markets move in a way which is beneficial to the trade then the profit margin can be much higher than it is in regular trading. However, if the markets move in the opposite direction, the loss-making potential is significantly greater than it is in regular trading, since with certain forms of spread bets traders can lose more than the amount they have invested, something not possible with traditional trading.

    Maverick says . . . "Play safe and stick with 1/1 . . . you will still make money but are always protected by the margin"

    What is spreadbetting ?

    Spread betting is an exciting and fast-paced method of trading which allows you to take a position without actually owning the options in question; the main advantage being that your initial deposit only needs to be a fraction of the actual price of the product.

    This is known as leverage, and allows ambitious traders to considerably increase the size of their trade, whilst also increasing their exposure. Traders can therefore make a large profit from a relatively small investment; conversely, if the market moves in the opposite direction to the trade then sizeable losses can be incurred, which can exceed the initial investment. Therefore, while the potential risk is greater than in conventional trading, so is the potential reward.

    What are spreads ?

    Spread.png

    Traders are given a ‘buy’ and ‘sell’ price for every asset on offer.

    If they feel that the asset will rise in value, they ‘buy’, in the hope that they will subsequently be able to ‘sell’ at a higher price, thus making a profit.

    On the other hand, if they believe the asset’s value will fall, they will ‘sell’, aiming to later ‘buy’ back for less and therefore make money on the trade.

    There is almost always a difference between the buy and sell prices, and that difference is called the ‘spread’. The smaller the difference between the buy and sell prices, the tighter the spread – this reduces your trading costs and increases the chances that your trade will be profitable if the markets move only slightly. ETX Capital is proud to offer a wide selection of competitively tight spreads for assets.

    Stops

    Stops.png

    ETX Capital offers several different types of stops to traders. In order to demonstrate the differences between these forms of stops, let us take the following example, where I decide to buy gold at a level of 1315.7 and want to place a stop;

    Regular stop-loss

    I place a regular stop-loss on the trade at a level of 1313.7, twenty pips below my purchase price. If the sell price of gold subsequently falls to that level, I will be automatically stopped out of the trade. It is important to remember that regular stops are NOT always guaranteed (see the guaranteed stops section for further details). Regular stop-loss parameters can be adjusted, but this would require me to actively move them to the new level.

    Trailing stops

    Let’s say I decide to use a trailing stop instead of a regular stop-loss. With the current price at 1315.7, I place the trailing stop twenty pips away at the 1313.7 level.

    Where trailing stops differ from regular stops is that if the market moves my way, a trailing stop will automatically move as well. To keep with our example, if gold then rises to a level of 1316.7, the stop level will rise to 1314.7, keeping pace with the rise whilst staying twenty pips away. Even if the markets subsequently fall, the stop-loss will stay at that new level of 1314.7 – unless, of course, the markets rise again beyond the 1316.7 level, in which case the trailing stop will move upwards to keep pace with the trade once again.

    Trailing stops ensure that your trade will remain open as long as the markets are moving in your direction. They also ensure that traders don’t miss out on possible profits to be made through steep market fluctuations. For example, let’s say that the price of gold suddenly rose sharply to 1325.5, followed just as suddenly by a slump back to 1311.5. Had I been using a regular stop loss, I might have missed an excellent trading opportunity and ended up being closed out of the trade at my original stop loss level of 1313.7. However, with a trailing stop in place I could have benefited from that fluctuation, being closed out near the top of the trading curve at a level of 1323.5.

    Guaranteed stops

    What happens if a piece of news with the ability to affect gold prices breaks after the market close? A regular stop could close out the trade as soon as the market opens – but there’s a chance that the market could open well below the set stop-loss level. A regular stop would then close at the first available price, meaning that your losses could exceed the initial deposit amount.

    However, with a guaranteed stop in place, even if the markets opened below your stop-loss level the guaranteed stop will have closed you out of the trade at the level you originally set. Therefore, whilst regular stops are ideal for short-term trades, guaranteed stops are worth considering for long-term positions; though there is a small increase in trading cost, they do provide increased protection.

    Stop orders to open

    Stop orders work slightly differently to other forms of stops; they allow traders to open rather than close trades. For example, if gold is at the 1315.7 level, I could use a stop order to open to initiate buying if for example gold were to hit 1318.7. Alternatively I could use a stop order to open with a ‘sell’ position if for example the price of gold were to drop to 1312.7.

    "Why would one choose to open a trade at that point, rather than taking a position at the current and more favourable level" ?

    The answer has to do with price fluctuations. If gold is at 1315.7 and has been hovering around that point for some time, I might not want to place a trade, given that I do not know what way the markets will move. However, if the price of gold suddenly rises to the 1318 level or falls to the 1312 level, this might be part of a larger rise or fall in gold prices and therefore would be an opportune moment to take a position in the metal. Having pre-established my stop to open at a precise level I would be able to capitalise on any general market movement in that direction. At the same time, if the markets were to move in the opposite direction, away from my pre-placed stop, it would not matter since the stop to open would then never come into effect at all.

    How to Spread Bet

    How.png

    Regardless of the instrument being traded the choices will be the same; traders can choose to buy if they believe that the market will climb, or sell if they think that the market will drop. The greater the subsequent movement of that market then the larger the profit or loss; it all depends on which way the market moves.

    ETX offers thousands of assets to choose from, including indices, forex currency pairs, equities, commodities and bonds.

    Spread betting explained

    How.png

    One of the differences between spread betting and regular trading is that when it comes to spread betting traders are not buying the actual product in question. Instead, they are trading based on the underlying movement of that particular market, with their original trading parameters depending on the size of the spread.

    For example, let’s say I decide to trade Microsoft. Microsoft stock is currently trading at a bid/ask price of 4528.1/4536.9.

    This means that if I decide to sell, or ‘short’ Microsoft stock, the level at which I will be shorting at will be 4528.1. If I instead decide to buy or ‘go long on’ Microsoft stock, the level at which I will be going long will be 4536.9. However, remember that with spread betting the original trade is not based on the actual price of the shares, but is rather based on the spread itself, which is the difference between the quoted buy and sell prices. In our example, the difference between 4528.1 and 4536.9 is 8.8; therefore 8.8 is the size of the spread.

    I then have to decide how much I want to trade per point. If, for example, I decide to trade at £1 per point, buying at that 4536.9 level, then I will start off with a deficit of £8.80. I will then need the sell price for the stock, which is currently at 4528.1, to rise beyond 8.8 points to a level of 4537 or above in order to make a profit.

    Let’s say that the market subsequently rose and the sell price for Microsoft stock is now 4541.7. If I decide to sell at this level, I will make a profit of £4.80, since the level I sold at, having moved upwards by 13.6 points, is now 4.8 points above the level at which I bought. If, however, Microsoft’s stock price falls and the sell price is now 4523.3, were I to exit the trade at this point I would lose my original £8.80 plus an extra £4.80, since the sell price is now 13.6 points below the price I purchased at.

    TIPS:

    Use discipline

    Decide on your trading strategy and stick to it. It can be tempting to try and change your technique midway through a trade, but it is extremely risky. There is a chance that revising your plan on such short notice will work to your advantage, but generally if you enter a trade with a certain plan in mind, throwing away that strategy and replacing it with something else is not advisable. For example, selling your current ‘long’ position in a falling stock and hurriedly shorting the stock instead is a high-risk strategy; you might recover your position, but you could double your losses instead.

    Set realistic goals

    Whilst it is often a good idea to have a clear goal in mind when you place a trade, it is wise to be pragmatic about results. In other words, it is extremely unlikely that you will change your life on your first trade. By managing your expectations more effectively, you can help yourself from becoming too disheartened if the markets do not go your way – something that is inevitable sooner or later, since even the most successful traders do not make money 100% of the time.

    Understand your market

    If you were planning on investing in a company, would you hand over your money with no questions asked, or would you take the time to research the company, looking at previous performance, current forecasts and any information you could find concerning the business?

    In this regard, online trading is no different. As with regular investing, it is wise to do your due diligence before trading a stock, commodity, index or currency pair. It is certainly not impossible to make a profit without conducting analysis beforehand, but properly researching a product prior to trading it may help you make better informed trading decisions.

    Be prepared to cut your losses

    Sometimes it can be better to close a trade that is going badly and accept the loss that goes along with it rather than staying in the trade and hoping that your position will recover. Though positions can sometimes recover, it is always worth remembering the following; just because a stock has already fallen by 90%, there’s no guarantee that it won’t subsequently fall by another 90%.
     

    Attached Files:

  14. Maverick

    Maverick Master Trader

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    If you listen to the media he is now getting 95 times as much again (95% of traders lose) . . . and still the country is skint :(
     
  15. Maverick

    Maverick Master Trader

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    Unfortunately this is their reply "I am really sorry but we do not offer the spreadsheet you are asking for. This is something that will not be added in the future"

    H'mmm - as far as i am concerned it's their loss . . . Welcome back GKFX :)

    Not sure if the same applies with other brokers. Cannot imagine GKFX being the only accommodating broker.
    .
     
  16. Maverick

    Maverick Master Trader

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  17. Maverick

    Maverick Master Trader

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    @ . . . . . . 0.5% . . . . . .1.00% . . . . 1.5% . . . . . 2.0 % . . . bet size

    £20.00 = 0.10 bet . . . 0.20 bet . . . 0.30 bet . . . 0.40 bet
    £40.00 = 0.20 bet . . . 0.40 bet . . . 0.60 bet . . . 0.80 bet
    £60.00 = 0.30 bet . . . 0.60 bet . . . 0.90 bet . . . 1.20 bet
    £80.00 = 0.40 bet . . . 0.80 bet . . . 1.20 bet . . . 1.60 bet
    £100.00 = 0.50 bet . . 1.00 bet . . . 1.50 bet . . . 2.00 bet
    £120.00 = 0.60 bet . . 1.20 bet . . . 1.80 bet . . . 2.40 bet
    £140.00 = 0.70 bet . . 1.40 bet . . . 2.10 bet . . . 2.80 bet
    £160.00 = 0.80 bet . . 1.60 bet . . . 2.40 bet . . . 3.20 bet
    £180.00 = 0.90 bet . . 1.80 bet . . . 2.70 bet . . . 3.60 bet
    £200.00 = 1.00 bet . . 2.20 bet . . . 2.20 bet . . . 4.40 bet

    Bet size can only be to one decimal place.

    The bigger the bet the less room to manoeuvre.
    .
     
  18. Maverick

    Maverick Master Trader

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    GKFX landing page @16 showing 0.4 spreads and 0.2 margins - I wrote asking where I could find these figures ?

    Their reply:

    "You are right in saying that the figure 0.4 pips does not appear on the Market Information Sheet MIS.

    However, please note that our variable spread account reflect market spreads and although there is a ‘Target Spread’ specified on the MIS, it CAN go as low as 0.4 pips on EURUSD - (
    WHEN ? - only ever seen 1.5 and pigs might fly - Maverick)

    Nevertheless, that spread could be wider than the ‘Target Spread’ at some points due to high volatility or lack of liquidity.

    Further, we do offer a spread of 0.3 points on SP500.

    Finally, the margin is 0.2% for all currency pairs"


    Don't think I have ever seen a spread less than one with GKFX ?

    Must have blinked and missed it :)
    .
     

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