Have You *Really* Got Time for Financial Spread Betting

By Dominic Walsh

3rd July 2008

"Buy low and sell high" is easy to say, but often hard to put into practice. That's especially true when you have to hold down a non-related, full-time job while trading at the same time. Here, we look at the key aspects in planning and managing your trades within your normal professional commitments.

Entering and exiting your portfolio of trades

In my experience as a trading coach, spread bettors often fall into the trap of spending almost all of their analysis time picking the perfect entry price point, with only an afterthought for figuring out their bet size and the price at which they aim to get out. This thought-process should be turned on its head. Concentrate on managing stop-losses and profit targets first. If you can't always be there when your losses happen, it pays to (a) pick trades that deliver significant rewards and (b) manage your stop-losses very well.

The most important aspect here is managing losses, because without money you obviously can't be in the game. While we may naturally take an optimistic outlook, over time it really is crucial to have a clear idea where to bail out if it all goes wrong. So, how do you manage a spread bet when the markets are not working out the way you expected? The real issue is how you will eventually manage your losses. The use and placement of your stop-loss will determine this.

Using a chart to determine key support and resistance levels is the simplest tool for looking at the best placement of stop -losses. The next question is often "which chart and what time frame?" See the link below, Using technical analysis to spread bet, for more.

Deciding which time frame, on the other hand, is a more complex proposition for which there are number of possible answers. Your time horizon will depend on how long you expect to spend in the trade.

Picking trades that are profitable requires you to be in tune with the market and make a paradigm shift into slightly longer time frames. In my experience, trying to spread bet the FTSE on a daily basis by hiding your mobile phone from your boss under your desk, with no online news feeds or internet web feeds, makes you nothing more than a gambler. Such an approach does not give you the edge you need to be successful.

Understanding that you need an edge will change your perception of when high probability trade set-ups occur. There will be periods during each year, when the market advances strongly and periods where the market remains tightly in ranges. Equally, every trend has pull -backs and nothing goes up in a straight line. This makes it very important to identify what stage we are at in the market cycle, irrespective of whether you are trading foreign exchange, gold or equities.

Platforms

Spread betting while away from a PC can be accomplished via the use of various buy or sell limit orders, often known as buy stop and sell stop limit orders. These orders allow you to trade at prices above and below the current market price. So this means that you can place your order to buy in advance for a share at a price that has not traded yet.

Once the trade is on, getting stopped out only to see the market subsequently rally is one of the most frustrating experiences a trader can have. Normally, the causes of this are excessively tight stop-losses, impatience in placing the trade (poor entry), and not understanding the natural volatility of the instrument traded.

To avoid these errors, try to enter at high probability points where there is a good chance for a reversal or a key breaking-out point. Also, place stop-losses further away than the first support or resistance level and make sure you account for the instrument's daily range. The temptation in spread betting is to always look for a quick profit by selecting shares or currency pairs that have strong movements and then trying to jump on the trend after the big move has happened. Often, this is the moment when the professionals are exiting for a profit.

Everyone has heard the old axiom, "let your profits run and cut your losses short". But how do successful traders get an edge in this area while working full time? Here we discuss some practical issues with trading part-time and how to go about getting an edge.

'One cancels other' and 'If done'

First, understanding slightly more complex orders will give you an immediate edge over those that ignore them. 'OCO' and 'If Done' orders will be crucial to your success if you do not have the opportunity to check your trading progress during the day.

'If Done' orders nearly always relate to entering a stop-loss order after your initial buy or sell order is executed. This automatically places a stop-loss order into the market at the same time your buy or sell order. For example, the FTSE opens at 6625 in the morning and you are not able to watch the markets as you have to attend to your day job. But you decide to place a spread bet long on the FTSE at 6600 at £10 per point if the market falls to that level because your analysis tells you this is a good support level long term. At the same time, you place an 'if done' order to act as a stop-loss and close the bet if the market reaches 6550. During the day, the market drifts lower and your buy order is executed at 6600. With your 'if done' order in place, your stop loss is automatically entered into the market to protect you from a big loss. Simple, yet effective.

Now let's look at 'OCO' orders. 'OCO' stands for 'one cancels other' - and this is a when two orders are placed into the market at the same time, normally a 'take profit order' and a 'stop-loss order'. Using the example earlier, there are only two probable outcomes. The market falls to meet your stop-loss point or it rallies to meet your profit target at 6750. But what if you are not on your screen and the market rallies up to 6750? By using an OCO order you are covered each way, because if the 'stop loss order' gets executed the 'take profit order' is cancelled. The reverse is also true: if the 'take profit order' gets executed, the 'stop-loss order' is cancelled. Either way, you are covered and you never had to look at a screen once.

Keeping track of your portfolio when at work may be one of your biggest challenges and the key to survival is the avoidance of big losses. If you avoid the big losses, the profits will come. The stop-loss will play a key part in this. Just as important is picking the correct time frame - a longer term one - as this will give you more time to get out if things go wrong. The best time frame for one type of trader can equally be the worst for another, as a long time frame requires patience. This seems to be an ever-rarer commodity among participants in today's markets. The bottom line: trading fairly long-term is best if you are only a part-time trader.

Like any other form of betting, spread betting invokes strong emotions, even in the most disciplined traders. While the thought of winning £100 tax-free may not excite you, the thought of losing £100 may cause you enough anguish that you end up exiting a perfectly valid trade. The shorter the time frame, the stronger your ability to control your emotions needs to be. If you are trading intra-day, you have to be pretty experienced to make any money and you simply don't have the luxury of sitting back for hours and thinking about what the right exit point is.

Think quick, act quick

If you still decide to trade intra-day or intra-week, quick decisions and the ability to reverse a position quickly is really essential for making money. Unless you have constant access to a platform and news flow, this form of trading is best avoided if you are trading from work. The constant pressure to check the markets will cause you to make mistakes through indecision and lack of focus. Choosing a longer time frame, such as a weekly time horizon, improves your results as you can take the necessary time out to evaluate positions and to learn the skills needed for trading better. As a general suggestion, start with a longer time frame first and, as you improve, you will naturally adapt to shorter time frames if needed.

Wait and hold back your firepower for only the best trades. Let the marginal bets go. This will be hard at first, but discipline yourself to only take bets where you are very confident. 'Fewer bets, more quality' is a good motto here. Getting this part of the equation right will keep you on the right side of trading and prevent you turning into a gambler - the worst kind of trader.