Online Financial Spread Betting

Recent years have seen a boom in online financial Spreadbetting, brought on by the ease of online trading. Being a leveraged product and Tax free, Spreadbetting offers huge rewards in only a short time.

Introduction

When Spreadbetting, you are basically betting on whether you think a stock (or other instrument) is going to go up or down in price. One of the benefits of Spreadbetting is that you can actually make as much money from a stock price falling as you can from it rising!

Some of the main benefits of Spreadbetting include :

Very high profits in a short time

Low initial expenditure. You don’t need huge savings to start making money

Unlike Day Trading, EOD (End Of Day) Trading only requires small amount of time in the evenings or at weekends. You can still keep that 9 to 5 job if you want!

Everything can be done online, from the comfort of your own home.

You can make money equally well from declining markets.

So how does it work? I don’t want to fill up this page with equations and calculations, but I think the best way to explain is with a couple of examples :

Example 1

You think that shares in Wall Street will rise in value. You visit your online broker who gives you a spread of 8345 to 8350 points. If you think that the price will go up, you buy at the higher of the two values. Therefore, you decide to Buy (go 'long') at 8350 for an amount of $20 per point. Over the next few days the price of Wall Street does indeed increase to 8430. This is an increase of 80 points, and because you bet $20/point, your profit is £1,600

8430 - 8350 = 80 points
80 x $20 = $1,600 profit

Example 2

Over the next few days, you think that ACME will fall in value. You visit your online broker again who gives you a spread of 4632 to 4638 points. As you think the price will fall, you Sell at the lower value. Therefore, you decide to Sell (go 'Short') at 4632 for an amount of $10 per point. Over the next few days the price of ACME does indeed fall to 4562. This is a decrease of 70 points, and because you bet $10/point, your profit is £700

4632 - 4562= 70 points
70 x $10 = $700 profit

Technical Analysis

OK, so how do we actually know when a stock is going to go up or down. Well, there are a number of techniques available, including Fundamental Analysis and Technical Analysis. Technical Analysis is the use of calculations and analytical charts to identify trends and buy/sell signals within a market. Fortunately, computers are pretty good at mathematics and if you’re reading this, chances are you’ve already got one.

Technical Analysis software allows traders to use indicators to identify stocks which are trending (rising/falling and likely to continue doing so into the near future) or likely to reverse. There are a huge number of indicators but generally traders will specialise in only few, which they have found to work for the particular markets which they trade. The problem is, most of the traditional indicators (like ADX) have been around since before computers were invented and don’t exploit the potential of what modern day PCs are capable of. You can also pretty much guarantee that most of the other technical analysis traders are all using the same classic calculations.

Software

However, there is a new breed of software which brings technical analysis into the 21st Century. One of the most impressive we’ve come across is Wave59, which not only includes all the common classic indicators, but also advanced Neural Networks (which actually learn from historic data to predict the future), trend indexes based on Chaos Theory, and much more. Overall some very powerful tools which will give you the critical edge over other traders. It is beyond the scope of this article to go too deep into how these indicators work, but let us have a quick look at some of what Wave59 can do:

The image above shows an example candlestick chart. Shortly after the start of 2008, you can clearly see that the stock took a steady decline from 290. This fall in price was signalled by 3 of Wave59's automatic indicators :

1. The 9-5 Count. This is shown by the red 9 shown above the bar. The 9-5 Count tracks price cycles (not time cycles) to determine future turning points. When a price cycle ends, the market makes a turning point. This tool is so powerful that it even works on predicting natural phenomena such as temperature fluctuations
2. Exhaustion Bars. This is shown by the red dot above the bar. Exhaustion Bars are entirely pattern based indicators, which have the advantage of minimizing "indicator overload" situations where an indicator remains overbought or oversold throughout an entire price move
3. Lomb Periodogram
. Underneath the price chart, you can see an oscillating red line, this is the Lomb Periodogram. When the red line is above the horizontal blue dotted line, this is a signal that the price has reached a high and is due to start a decline. This indicator displays the phase of the current dominant cycle as calculated using Lomb's Periodogram.

All of these 3 indicators together signal that we should Sell (or go Short) at 290. If we had gone short at $100/point, this would have resulted in a profit of $7,900 as the price dropped from 290 to 211. Further information on these indicators, and many others, can be found here

Risk Management

Financial spread betting carries a high level of risk, therefore you should only speculate with money you can afford to lose. Financial spread betting prices can be very volatile and the resulting losses may require further payments to be made. This is the downside of such generous profits when you have predicted the price move correctly. Fortunately, there is a facility available to minimise your losses called a Stop Loss.

Every bet you make should always have a Stop Loss so that, in the event that the price moves dramatically in the opposite direction to which you anticipated, it will automatically kick in at a preset price and bail you out. The trick is to set your Stop Loss far enough away so that it is not prematurely activated by the natural fluctuation of the price during the trading day (which would result in a loss), whilst making sure it is close enough to minimise your losses.

As a common rule of thumb, you should not risk more than 1-3% percentage of your funds on any one bet. You may think that this is overly conservative, but you are not going to be right all of the time. Imagine you risked 50% of your funds, you would only have to be wrong twice before you’d be wiped out. Discipline is an important virtue of a successful trader.

We hope this has been a useful insight into the highly profitable and increasingly popular world of financial Spread betting. The techniques of being a successful trader really is a large subject, however a good starting place is the website of the software we thoroughly recommend – Wave59. Good Luck!