If you want to make money using financial spread betting then you need a strategy. Without a carefully thought out strategy, you may as well be playing slot machines. It is your strategy that gives you an edge over the long term, and it is that edge that will earn you money.
Developing a winning strategy entails defining all aspects of how you will go about your financial spread betting. To do this we need to look at what instruments and markets you will trade, how you will evaluate a potential spread bet, exactly how and when you will enter and exit the market. Your winning strategy also needs to examine how you size your individual spread bets. Let’s take a look at each of these areas in turn:
Instrument Choice
From your one spread betting account you will most likely have access to a wide variety of markets and instruments. The first part of your strategy should dictate what you are going to trade. If you have a strong attraction to a particular instrument and market, then follow that feeling. Most people tend to start with either indices or forex, so try these if you are unsure where to begin. I believe that it is more profitable to become an expert at one instrument and market rather becoming than a jack of all trades. You will come to learn that each instrument and market has a character of its own and learning this character will make you more profitable.
Set Up Selection
Once you have chosen your markets and instruments, you need to decide what set ups you are going to be using. Do you use technical analysis to look at support, resistance and chart patterns? Are you just looking for an instrument that is trending strongly in order to buy or sell pull backs in that trend? Do you use indicators to help you discover profitable set ups? What time frames will you use for your analysis?
Entry Timing
Once you know that you want to enter a new bet, how do you decide the exact moment to enter. Do you just enter at the start of the next day, or do you use an entry trigger to get in? If you are using an entry trigger, then where should you be placing that trigger?
Exit Timing
Once we are in the new spread bet position, are we going to actively manage it as time goes on? We will most likely want to limit our initial risk by placing a stop loss in the market. We may want to then lock in some profits with a trailing stop if the position moves in our favor. We also need to decide whether we are going to have a profit target or just let the position run indefinitely.
Position Size
Your long term survival as a financial spread better is the most important part of your strategy. How do you decide what your stake should be? You need to size your positions so that it would take a very large number of failed trades to take you out of the game. With a decent strategy the probability of getting 100 failed bets in a row a statistically minuscule, so plan your position sizes so that you can withstand a bad run of this nature. In practice this would mean that if you have a trading account of £10,000 each failed trade should lose no more than £100. You should know your stop loss position in the market before each trade so can use this coupled with your maximum financial loss per trade to calculate your position size.
Of utmost importance is the preservation of your own capital. Keep optimizing the different aspects of your strategy until you are happy that you have something that works for you. Without proper testing you will not know whether your strategy is profitable or not. Practice with a very small stake size until you are confident that you do have an edge and then stick to your plan.
Developing your own winning strategy involves you deciding on each of these factors ahead of time. Formulate your spread betting plan and stick to it. This article has no doubt asked more questions than it has answered, so look out for future articles where we’ll be going into more detail on each of the components of a winning strategy.