I was chatting to my mate the other day about investing. He has been priced out of the housing market and would like to invest some of his savings. We were chatting about it and I suggested that he looks at FTSE spread betting.
He looked at me as if I was mad. We had a discussion about it and I thought that not many people know about FTSE spread betting so I decided to put this site up about it. I think discussing it will allow you to see some options even if you don’t decide to do it yourself.
OK before I suggested ftse spread betting I knew that he wanted to invest in the UK as this is what he would feel most comfortable doing. He knows what it is and hears about it on the TV so he would be able to follow it.
We first discussed holding individual shares and the risks involved in doing that. He was quite adamant that he wasn’t interested in individual shares.
We then spoke about managed funds, trackers and I raised the issue of ETFs. As we were speaking about that I could tell that he liked the idea of a tracker. Cheaper than a managed fund and tend to have better returns (apparently).
It was at this point that I mentioned FTSE spread betting. He didn’t like the word betting so I explained some of the benefit of it.
Most of us know that the FTSE 100 is a barometer of how the largest (by market capitalisation) London listed companies are performing. If the FTSE 100
is up, broadly speaking it was a good day for most of those companies and vice versa.
So when you take a position on the FTSE, you are in effect taking a position on those London listed companies. FTSE Spread Betting has lots of advantages and I will briefly go over them now before going into more detail in future posts.
- With FTSE spread betting you don’t have to pay tax on your profits or stamp duty in the UK.
- You don’t have to pay commission so you can start of with a small amount of capital.
- There are small minimum capital requirements so he would easily be able to open an account.
- If you wanted to do something other than FTSE spread betting then you could do so from the same account.
- It is easy to learn.
The next point I will make about FTSE spread betting can be positive to some people and negative to others. You trade on a margin so you use leverage. This is great when you make a profit but can be devastating when making losses. It is important to understand this risk before you start. It is possible to lose more than your initial deposit with leveraged trading.
An index spread bet is one that is issued based on a particular index such as the FTSE 100, which is a collection of shares and the corresponding composite value of its components. Some of the major international indices include the Dow Jones Industrial Average (US), S&P 500 (US), Nasdaq 100 (US), FTSE 100 (UK), CAC 40 (France), DAX (Germany), Nikkei 225 ( Japan),
Now let’s have a look at a couple of practical examples of how you might use spreadbetting to trade the FTSE 100. There are a number of possibilities for betting on this index, including betting on mid-day prices, daily close prices and monthly prices. It is also possible to bet on the more volatile daily futures market for the FTSE, as well as the price of the FTSE 100 iShare.
In round numbers…. the FTSE 100 did this in 2008:
6600 – 5400 = -1200 points
5400 – 6100 = +700 points
6100 – 5400 = -700 points
5400 – 6400 = +1000 points
6400 – 5000 = -1400 points
5000 – 5600 = +600 points
5600 – 3600 = -2000 points
3600 – 4600 = +1000 points
4600 – 3700 = -900 points
3700 – 4700 = +1000 points
4700 – 3400 = -1300 points
So, one point of maximum fear was at -1200 and those who bought got the relief rally had to sell and buy and sell and buy…..
In real time there was no way of knowing the point of maximum fear, there were just buy signals and sell signals. And then we worked out that momentum was coming out of the move down….and there was light at the end of the tunnel.
In my opinion we can only trade the plan for our stocks and a good plan is for little losses and bigger gains. That way we lose a little along the way but we catch the big moves when they come.
FTSE has so far seen a sell-off of 6100-5550 – a modest (compared with what we saw in 2008) 550 points. However it has broken key support and is technically in freefall to 5000 area. Will it bounce from here and then fall, or bounce from here and keep going up? How can we possibly know. Real time….we can’t.
I am happy to give up some points waiting to see….but I will continue to poke around the edges of my watchlist in case there’s a rally back up to 5900 or 6100.
…so buy at point of maximum fear sounds lovely but in reality….you might have to take some bum trades to actually do that.
Placing your Bets and Closing Positions
Let’s assume that we switch on our computer at the beginning of the day and find that the FTSE 100 closed at 5,300 last night.
- Our spreadbet company is neutral about the FTSE’s prospects for the day and forecasts that it will close between 5,300 – 5,305 at the end of the day, (this is known as the quoted ‘spread’).
- We have the option of ‘buying’ the market, (or ‘going long’), in anticipation of the market finishing above 5,305 at the end of the day or ‘selling’ the market (‘going short’) in anticipation of the market finishing below 5,300 at the end of the day.
- We are expecting some good company results and think the FTSE is likely to finish up around the 5,350 mark at the end of the day – so we choose to ‘buy’ the FTSE at 5,305 and bet £10 on every point it finishes above the quoted spread.
Closing your position
Now there are 2 possible eventualities here – the market could finish up or down:
- If the market goes up strongly by lunchtime – to 5,325 – we might choose to ride the profit and wait for the market to close before taking our winnings. The market closes the day at 5,340 and we win (5,340 – 5,305) x £10 = £350. A good result!
- If the market goes against us by lunchtime and the quoted spread falls to 5,280 – 5,285, we might choose to close out our position early and cut our losses for the day. We sell at 5,280 and stand to lose (5,305 – 5,280) x £10 = £250. A disappointing result – but at least we didn’t wait until market closed at 5,265 when we would have lost a lot more money.
In practise, most of the major spreadbetting firms also offer a range of limit and stop orders which will automatically execute buy and sell orders on your behalf to take the profit if the market moves favourably to a specified level or limit your loss if the market goes against you.
Spread Betting Beginner: So I’ve done it! Account open and first positions taken. I went long on the FTSE at about 2pm (5255) and Dow around 4.30 (10243). I have rolled the FTSE over and pushed up my stops on both so I can’t lose! How much? both 10p pp so far I am guaranteed enough for a pint and if my luck is in I’ll have enough for a pie as well! And who said a man couldn’t live off spread betting? All I need to do now is work out how to feed the family 😉
Never mind the amounts mate, but the strategy is good! Protect your capital at all times, and you’ll always be at the table to play a hand. In due course, crank it up slightly – keep applying the strategy….
Trading Rules: Trading the FTSE 100 without losing your shirt, your car, your house or your wife!
I decided to include this section in order to keep me focused on my goals. After analysing all my 2012 trades, I posted about my top 10 trading mistakes, and came up with the following set of trading rules to help me avoid making the same mistakes and to maximise my profits.
Essentially the only way to stop making the same set of mistakes over and over again is to entirely replace bad trading habits with new ones, and to set up a set of rules that can be easily followed to achieve consistent trading success.
Additionally, you need to realise that one way to improve your trading habits is to start doing the opposite of what you’ve been doing so far. So where do I begin …
Well my most expensive trading mistakes were taking poor trades in the first place, some of them were impulsive trades and clearly not well thought out or planned in terms of entry, target, and stop loss.
RULE # 1 – Only place a trade when your specific trading criteria is met.
Plan out each trade so you know exactly when to get into a trade, why you’re placing that trade, what the risk is in terms of points or money, and where you’re hoping to take a profit.
The trading criteria itself doesn’t need to be complicated, and in the past it’s been something that I’ve spent far too much time agonising over – thinking there was some magical trading formula that I was missing and needed to discover. Very simply, your trading criteria can be as simple as the next 5 minute candle closing on the other side of the 20 minute moving average, or the market bouncing off a previous level of support.
Secondly, some of my biggest losing days were when I tried to chase the market and doubled or trebled up in an attempt to salvage a losing trade. After making a bad trade I would take out additional trades in order to average down my position, and in the majority of cases, those trades ended up as huge losers.
RULE # 2 – Never add to losing trades.
The best loss is the first loss, so accept the loss and thank yourself that you didn’t lose any more money. Looking at my trading stats, there were a couple of losing days that turned out to be massive losers, and in hindsight, if I had just taken the first loss without placing additional trades, I would have saved myself a small fortune.
My third main mistake was snatching at profits instead of letting my profits run. I would quickly close out a position after making a measly 5 or 10 points instead of having the confidence to leave the position intact for a little longer. This is the fear of losing coming into play…
RULE # 3 – Move the stops breakeven to establish a risk free trading opportunity.
The real idea here is to protect your stake and not to let a winning trade turn into a losing one. When in profit, fight the urge to close the position immediately and instead, move the stops to breakeven. This way no matter what happens, you’re not going to lose any money. For additional safety, you could also close out half your position at this stage, and allow the remainder to run.
My next mistake was getting stopped out too frequently and on a number of occasions the market would stop me out and immediately proceed in the direction of my trade. So either my timing was incorrect, rushing into trades, or the stop loss was inadequate. I think I have a way to address this mistake …
RULE # 4 – Trade small but use a larger stop loss.
Instead of opening up relatively large positions with very tight stops (some trades taken with just a 10 point stop), open up a smaller position with a 25 or 50 point stop loss. This allows the trade to develop and gives you some breathing space to allow the market to get back into profit at some stage. When it does, follow rule # 3 immediately.
My last main trading error has been not having the confidence to add to winning trades. Obviously, when you’ve had a string of losing trades, your natural instinct is to grab a profit when the next trade seems to be going your way. But picking up 4 or 5 points is not going to make you rich, especially when immediately afterwards, the market shoots in the direction of your intended trade, leaving you to sit there shaking your head in disbelief having missed out on a 100 point move.
RULE # 5 – Add to winning trades on retracements
The rationale behind this rule is to try and take the opposite action of what an unsuccessful trader with bad habits would do.
Instead of adding to losing trades, only add to winning trades on the next significant retracement – say after the market pulls back to one third or a half of the last high, or alternatively, track the market along the line of a significant moving average and periodically open up additional trades in the same direction as the first trade when the market drops back to touch the MA. Trying to perfect adding to existing trades takes a lot of confidence and a certain amount of experience. Not an easy rule to master so tread carefully.
Try and implement these five trading rules the next time you trade the FTSE and hopefully they’ll help you avoid some common trading mistakes while making your trading a profitable experience…