Spread Betting Guide

Jan 9, 2006

by Stu Whisson

‘Your account’s open, but what next?’

Imagine you’ve opened your account, you’re fuelled up and excited by the prospect of making considerable tax-free profits, and you go on line for the first time. Although you understand the principles of spread betting, it still looks confusing, perhaps even bewildering and downright scary!

We’ve all been there. It’s frightening to realise that for the first time, YOU are in total control of the X amount of cash with which you’re willing to speculate, entirely dependent on YOUR OWN decisions and skills at analysis of financial data. Now it just sounds too daunting for words. Quick, phone up the broker, mind the cat, cancel everything and carry on working 9 to 5 the rest of your life……. sigh…… STOP!

Does all this sound familiar? You have seen the adverts, the words TAX FREE resounding in your head; you may have read many of the posts on forums, seen the relevant news articles and no doubt been bombarded by junk mail that offers you “Ł400 per week from sitting on your toilet, lying in bed, or comatose in the garden”. You get the idea. You then asked for a very glossy, very persuasive information pack from one of the brokers, who then explained it all in relatively simple terms, though perhaps some were a touch technical. Subsequently you now have an account and are raring to go.

But where do you start? Into what markets are you best dipping your toes? How does it all work, really?

Well, in this article I will take you through some of these questions and many more. You see, many moons ago, I was in the same position as you. Since then, after I recovered from the shock of watching my margins go down the tubes, I decided to learn all I could about the markets. I now trade, like you, in spread bets; I also teach new and intermediate traders how to trade successfully, by way of my own company (www.insightsupport.com). Yes, I admit that was a plug, but hey, it’s the law: apparently you have to slip one in somewhere! A lot of what you will read is from my own experiences while some is actually taken from my training courses. Nothing in the following article will cost you a single penny. I am a great believer in making sure that people understand the basics, at the very least, so we all start from the same place. If you think I am teaching some of you to suck eggs, then great! It won’t hurt for those that already think they know to have some revision.

Financial spread betting

There's been a great deal of negative talk about financial spread betting over the years. Sadly the media coverage and many of the rumours have been blown out of proportion. As a result, many people decide not to look at financial spread betting as an option, let alone as a real chance to add to their current income or indeed in some cases replace it as much as 10 times over. Therefore I think I should begin with dispelling a few myths that seem to be running around and that I have heard mentioned here and there, mainly started by people who know nothing about it and seem to me to be incredibly ignorant.

Myths:

Nobody wins at financial spread betting!

Well if that was the case then nobody would do it, least of all the major institutions. If people weren't making serious money then there wouldn't be a market for it, indeed a market that is growing at an incredible rate. There do have to be winners and losers, else the whole concept wouldn't work. Current estimates show that almost 90% of those that 'play' (we’re not playing) the financial spread betting markets lose their deposits or close their accounts within 3 months. The fact is that 90% of people who become involved with financial spread betting do so without any real plan. They just blindly throw their money into anything that seems to be going up or down (mostly up) and foolishly believe when they're losing money that the tide will turn so add more money to it, or trade the opposite direction. That in it self is a real losing strategy in my eyes. There are sensible ways of what is called 'hedging', but don't do it blindly to recoup a loss. Before they know it they have lost their deposit, return to the pub and complain that it's all a con.

Now this is where it gets interesting. Given the fact that a large percentage of spread bettors are losing their deposits, we move to the 10% who don't and in fact make all the money the other 90% are losing. Sounds very cut-throat and I suppose there is no other way to describe it: someone is profiting simply because someone else is losing. You are profiting and you will do (not to forget you will have losing trades too) because you are in the 10% who have a real trading strategy and not some toss of the coin investment technique. So take heart in the fact that what you have wisely invested in as regards this guide will arm you very well, in order that you can make educated choices and not trade blindly.

It's futures & options

NO! There are similarities, but they are not futures or options contracts at all - they are very different things. For instance to invest or trade in futures and options you need more capital and to know your market well. Some people that have been very successful with financial spread betting do sometimes move to futures and options as there are some similarities. For instance, they are all highly geared and the power of making money is in the leverage, and you can make money when the price is going up or down. That's about it! Futures, and especially options, are highly complex and I would discourage you from trading in them for a long time yet, regardless of the amount of money you may have now to begin trading.

I will point out though that financial spread betting prices are usually linked to those of the futures (or sometimes the options) market for that particular stock or index. So in effect you are getting the best of both worlds. The potential profitability of futures and options but without the large amount of ready cash required to trade in them.

Also, because most of the time the financial spread betting bookmaker links his price to the futures markets, the prices that you see quoted are somewhat out of sync with the actual index or stock quote. I will talk about this later, but in general, don't worry about this discrepancy.

You need to be wealthy to begin with

Perhaps that was true in the early days, but is certainly not the case now. You can open an account with as little as a Ł100. Now neither is that sum going to break the bank nor, of course, is trading with that amount going to make you wealthy - no matter how well you do. What it will allow you to do is to learn how to trade. That's what I want to show you to begin with. That's why when we get to the point of opening an account, I only want you to open one with the bare minimum and I will show you exactly where you can do that and how.

When you have begun to prove to yourself that you have the techniques and knowledge to trade with consistent profitability, then - and only then -would I suggest you begin to add to your deposit. Up until that point, just use the Ł100. Let's not run before we can walk and by doing so we’re guaranteeing that we’re not going to lose the shirt off our backs and stops us from worrying about it too much. Before we even start to trade with REAL money, you should have had a couple of months virtually trading with one of the many virtual accounts that we have listed and ready for you to join. Don't do that just yet though. Learn the techniques and read the book at least once before you start even virtually trading.

Very few people spread Bet!

That is rubbish. At present in the UK alone, there are over 50,000 people who have a financial spread betting account with one of the leading financial spread betting bookmakers. Plus, there are more and more financial spread betting companies entering the fray every month. The market is booming. I think it's because of recent events with people's own investments held in pensions etc. People have realised that the institutions really aren't doing a great job of it and that they can easily empower themselves and do it their own way. Also, there is more and more written about financial spread betting every day, so many of the rumours are starting to be dispelled. Plus, you name me any other method of making money from the markets when they actually go down as well as up! So slap yourself on the back for taking that first REAL step and learning more about a way that CAN make you wealthy.

If it was that easy why isn't everyone doing it?

The fact of the matter is that quite a few people are doing it; it's just that not many people actually shout about it. Usually for the previous reasons I mentioned. That is why I suggest to you that you prove that you can do this first by using a virtual trading account, then move to a small margin with one of the financial spread betting companies I will tell you about later. Only when you have become totally comfortable, confident and making regular profitable trades would I even suggest that you start telling anyone about this.

A great deal of your success in this game is down to your attitude to having winning and losing trades and you will have your fair share of both. The last thing you need is some member of your family or close friends asking you how you're doing, and you say that you have lost a few trades. Their negativity alone will knock your own confidence. So do me a favour, in fact the only one I am going to ask you to do. KEEP YOUR MOUTH SHUT!

When your friends, family or colleagues see you driving around in a flash car that you bought for cash, then perhaps tell them about it. Don't be surprised however, if even then they don't believe you. Remember, most people only believe that there is one way of making money and that is to have a job that they don’t like and will spend forever complaining about.

There are millions of myths surrounding financial spread betting. I've just pointed out the key ones that seem to be bandied about these days. Pay little attention to them. Stay focused on what you need to learn. It's not that hard, it just requires a little bit of thinking and once you grasp it, you will wonder what all the fuss was about.

So What is Financial Spread Betting?

Financial spread betting is a highly geared bet on the future price of a product (can be anything) either going up or down. Simple really. The real money making power lies in the leverage. Let’s look at this in more detail:

We believe that the Dow Jones Industrial Average Index (DJIA) is going to go up in the next few days. We have analysed the charts and can see that there are various key pointers that suggest this. So we go to our trading account and look at the DJIA and receive the following quote:

DJIA (March) sell @ 7475 buy @ 7485

Don't worry about the (March) comment just yet. So we think that the price is going to exceed the current quoted price. We therefore trade say Ł10 on the DJIA going up in the short term. This is known as GOING LONG. You are opening a trade where you expect the value of that instrument (the DJIA, in this case) to increase.

So we have staked Ł10 per point on the DJIA (March) going up in the short term. The next time we look at the DJIA it has reached 7595 (up 110 points) so we decide to cash in. We are closing a buying position and it is called sell to close. Because we have already bought, we need to sell to release the equity in the contract. We go to the FB’s (financial bookmakers) Internet site and receive a quote of:

DJIA (March) sell @ 7595 buy @ 7605

We sell to close that releases the following profit from the trade:

We bought: DJIA @ 7485
We sold: DJIA @ 7595
Points difference: 110 points
110 points x Ł10 = Ł1100

Not bad for making a few quick choices. I will talk more in depth about protecting your deposit by using stop loss Orders and ways of locking in profit. I just want to cover the very basics to begin with. Then we can look at using tips and tricks to limit your risk and increase your profits.

The next trade we look at is the FTSE100. We have looked at the charts and also feel that there is added strength in the argument that the FTSE100 will fall, from all the other data that we have quickly analysed. So we go to our FB website and get a quote on the FTSE100 as follows:

FTSE100 (March) sell @ 4000 buy @ 4010

From our judgment we believe that the FTSE100 will fall much lower than the current quote of 4000. So we go SHORT (SELL) the FTSE100 @ Ł10 per point. We have opened a trade where we expect the value to go down in value.

We wait a few days and the FTSE100 drops even lower. So we go to the FB website and get a new quote on the 'Footsie'. We are quoted the following price:

FTSE100 (March) sell @ 3590 buy @ 3600

Now this is a key thing to remember. We have opened a contract on selling at 4000 so to close the contract we need to BUY. So we BUY to close @ 3600.

FTSE100 Sold @ 4000 (SHORT)
FTSE100 Bought @ 3600 (buy to close on short)

Points difference: 400 - making you a massive tax free profit of Ł4000.

We have just covered the very basics of making a simple LONG trade (upward – Bull trade), and the basics of going SHORT (downward - Bear trade). To close a long trade we sell to close and to close a short trade we buy to close. Please be aware of using the word ‘sell’. It would be natural to assume that when we have traded either long or short, then to close that trade we sell it. This would seem quite natural to think that way. However, should you trade with your financial bookmaker (FB) over the telephone or the Internet, this would lead to a great deal of confusion.

For example say we have opened the previous short FTSE100 trade prior to calling our FB looking to close this trade. We call the FB and get a quote and if we said, "I wish to sell FTSE100" this wouldn't close your previous position, it would ADD to your previous short contract. The FB would ask, "What is the size of your trade sir?" and this would cause you even greater confusion. So remember:

When we expect the price to go up, we go LONG and we SELL TO CLOSE to release any profit.

When we expect the price to fall, we go SHORT and we BUY TO CLOSE to release any profit.

Contract Periods:

On all trades that you make you will notice that there are what are called contract periods. These are designated times where the contract will automatically close.

Quarterly

Quarterly contracts run for 3 month periods and close on the 3rd Friday of the month in question.

Example:

FTSE100 (March) sell ... Buy ... High ... Low ... Bid ...

This is what you would expect to see (along with a list of other Indices) when you wish to trade. There all quite self explanatory. The March month is the contract month when this particular trade will expire. The contract months run as follows:

March - June - September - December

The FTSE100 trade above would expire on the 3rd Friday in March. When the trade expires, this means that the trade is automatically closed for you. Depending on the FB and the time of year you can have two contract months appear for the same Indices/Trade etc. Don't be surprised when you see FTSE100 March and FTSE100 June next to each other. It's down to personal choice as to which one you wish to trade, and in the long run makes little to no difference. Except if you traded the June contract your trade would expire later, obviously.

Daily

There are other options that have always been available, such as daily trades that expire at the end of the day. These tend to have a lower spread (the difference between the mid price and the sell (bid) and buy (ask) price). They can be good for trading over a very short time, especially if you expect a certain trade to move quickly within one day. More about the use of what I call ‘bounce’ trading in the techniques section.

Rolling Bets

A relatively new type of trade, where the trade is closed and re-opened the next day, any profits are calculated from a combination of the current interest rate and the stocks current value at the time of close. More about rolling bets and their uses later.

Making a trade:

We already know what the sell and buy markers are. The high and low refer to the current DAILY high and low of that market. Therefore, you can quickly see from the quote that you receive how close that is to that day’s lowest or highest price point. Simple really. If you, for instance, asked for a quote on FTSE100 and got a sell at 4000 and a buy at 4010, the daily high was 4044 and the daily low 3990, it might make sense to go SHORT as the obvious trend, without looking at any chart, is down. A word of warning though, this is just one of the many criteria that you should use. Don't use this as a primary trading strategy. Many people sadly do and end up losing a great deal, as the markets can swing quickly and the current low may turn out to be the actual low of the day, so you would be going short very near the bottom.

The bet is the amount that you wish to trade per point. For example if you bet Ł10, you would be betting Ł10 per point by which that contract goes up or down. When you have entered the amount you wish to trade, you usually then press TRADE which will connect you with your FB live who will give you a price. Now you have to act quickly here. So you MUST know which direction you want to trade. Sell (SHORT) or buy (LONG) - the quote for each will appear on your screen for only a few seconds, as the markets move so quickly. Make you choice, you will than receive an on screen contract number that will also appear on your statement sent by post or e-mail.

When you call your financial bookmaker, don't expect any long winded courtesy. Don't take it personally, they're not horrible people at all. They are incredibly busy people and have to supply you with a quote as quickly as possible. The usual conversation for a trade made over the phone is as follows:

FB - "Hello FB, can I take you account number?"
You - "Hello, yes its wrx1234"
FB - "Mr Jones, what can I quote you for?"
You - "FTSE100, please!"
FB - "FTSE100 is 4400/4410"
You - "I will go long on the FTSE100 @ Ł10 per point"
FB - "Thank you Mr Jones - you have gone LONG on the FTSE100 March @ 4410 - Ł10 per point trade! Is there anything else?"
You - "No thank you. Goodbye"

And that’s that. Two points I must mention. NEVER tell the FB when you ask for a quote in which direction you intend to trade, e.g.: "FTSE100 short please", instead just ask for the FTSE100. Secondly, if you don't wish to make a trade after receiving the quote just simply say "Nothing done". Communication over the phone can be risky and when it's as serious as this, it has to be made clear so each party understands. It's not being rude at all, you are just doing business.

So don't take it personally when the financial bookmakers (FB) are to the point and what can come across as rude. They are just doing their job as quickly and as effectively as they can.

Another thing I must point out is that they present the sell and buy as two numbers. They rarely say "Sell is...." etc. They simply state "FTSE100 4400/4410" and you should read these as the first number being the SELL price and the second being the BUY price. This is standard practice and if you're not sure what they said ask them to repeat the quote. However the second time around it maybe a different number as the markets do move very quickly.

You now know how to place a basic LONG & SHORT trade using the FB's website or over the telephone. May sound complicated at first but after a few times practicing it will become second nature to you.

Risk Exposure & Money Management

Now that we know the trading basics, we need to address the key issue of Risk Exposure. Risk Exposure is simply the maximum amount of your margin/deposit that could be lost in a trade. The FBs give you various tools that allow you to limit your losses and lock in your gains (profits). The main ones are listed below along with their use.

STOP LOSS

A stop loss does exactly what it says. It’s a price point where you want to signal a close on the trade. For instance lets say that we have opened a LONG trade on the FTSE100 (March) @ 4000 at Ł10 per point. Now we don't want to risk too much and we know that the FTSE isn't highly volatile, so we place the stop loss at 3950. Which would mean we would be risking a maximum of Ł500.

Before you start panicking and shouting at the monitor saying you don't have that kind of money. I am just using the Ł10 trade as an example. It can be anything from 1p to Ł500 per point, depending on your financial position.

What happens now with the stop loss is should the price fall to 3950 you would be what is called “stopped out” and the trade is closed for you. You are not given any warning, it is up to you to watch the market and decide to leave the stop loss in place or reduce your exposure amount e.g.: increasing the number from 3950.

Very few people actually use “stop losses” properly. Here is how some people use “stop losses” and wonder why they keep getting “stopped out” all the time. They place their trade and put a stop just a few points below their opening price. The trade amount they opened is quite high and therefore risks a considerable amount of their margin on deposit with the FB. Therefore to reduce their Risk Exposure, they have a limited stop loss. This is a common and tragic mistake, regardless of the market that is being traded.

Markets fluctuate all the time. They don't stay static and go up or down. Even indices that usually have low volatility, such as the FTSE, will fluctuate to some degree! What happens when you place a stop loss too close to your initial opening price is that you will get “stopped out” very quickly, and lose money as a result. This is what is known as 'Death by 1000 stops' as what usually happens is the trade is reopened and the same shallow stop loss placed again, to which in a few hours the trader has lost by being “stopped out”.

The sensible method is to first look at the chart for the previous week and check to see how much it fluctuates - my rule of thumb if I am unsure is to look at a Daily chart broken down into 15 minutes intervals for a day, followed by a broader hourly chart covering 1 week. We’re not looking at the massive trends, just the typical movement over a given short time. By analysing the chart ((we will go into this more in depth later) we can then see where our stops should be placed, relative to the trade we opened. The other thing is if your trade is a high trade e.g.: Ł10 and you can't afford to go beyond 50 point stop loss, then simply reduce your trade. It's much better to have a more flexible stop loss and a lower trade, than a high trade and a small stop loss.

Remember, if you are unsure of the volatility of the market you’re trading, first look at a 15 minute chart that covers a day, then an hourly chart that covers the week. This way you can spot the basic short-term volatility and where to place your stop loss. Most charting packages and online charts allow you to draw lines on the highs and lows of your chosen time period which will help gauge current volatility.

Since first writing this workbook the FSA in the UK have advised that many bookmakers automatically place a stop loss when you open a trade. This has some advantages, in that should you forget to put in a stop, you are automatically protected. However, with these types of accounts, sometimes there is little flexibility in moving the stop loss.

For example on some UK trades the point movement isn’t as wide as it is with some US trades. However, to lock in profit with UK trades on an account where the stop is automatically added, you have to wait until the stock has moved a considerable distance before you can move your stop in and lock in profit.

It is worth looking around the financial bookmakers that are available, as there are many of them now. More so than when I first started writing this workbook a couple of years ago. Maybe it’s because there is never such a thing as a pour bookmaker. This does make things better for everyone, in that as the market has really started to mature, more and more products become available for us to trade and the more means we have to profit. Plus with the added competition of all the other bookmakers around, we get lower spreads. So, look around before opening an account. Ideally you don’t want an account that has very little flexibility in moving the stops and has large spreads.

For instance, some of the lower end spread betting companies that allow you to trade pennies rather than pounds to begin with – these are the ones that are focussing on the beginner – have very large spreads, so be careful. Remember the spread costs you money.

Locking In Profit - with a stop loss!

Sadly this is a technique that few traders use. I’m not exactly sure why, but there is maybe a misconception that once a stop loss is placed it can't be changed. This is nonsense and one of the key methods of locking in profit in a trade. What does locking in profit mean? Let’s say we have the same trade as before, but instead the market goes in our favour past our original opening price and because it was a LONG trade we are now in a profit position.

All we do is either call the FB or even better go to the website and change the stop loss so that the stop is actually higher (because we went long) then our opening price. This therefore guarantees the profit we have locked into that point.

Opened at 4000 long on the FTSE100 @ Ł10 Trade. We set the first SL at 3950. Our risk is Ł500. The FTSE100 goes up to 4100 in a couple of days. We have been wise and have gradually throughout this time increased the SL from 3950 to 4050, locking in a Ł500 profit.

You can use the same principle for going SHORT also. You just have to think in reverse. You set your stop HIGHER than your opening price and lock in your profit (when its there) by going lower than your opening trade price.

Locking in profit is paramount to your money management when financial spread betting. Always look for chances to lock in profit, it is one of your keys to success.

We have covered the stop loss, but one of the things you must be aware using a stop loss is the following:

The markets move incredibly quickly and if there is a rush on any share, or index or what ever it is, sometimes a panic is started. This panic, good or bad, can send your trade soaring upward or plummeting downwards. Using a stop loss will protect you to some degree when the market is flighty. Lets say we have traded the FTSE100 and for some obscure reason the market crashes badly - a rare thing for an index to crash but not that uncommon should you say be trading in highly volatile instruments such as technology stocks. These can plummet or soar very quickly indeed. For this example though, we will be using the FTSE100 as that is our 'de facto' trade for this course.

Say we opened a trade on the FTSE100 at 4000 going LONG @ Ł10 per point. Something terrible happens which results in the FTSE crashing and within minutes it starts to plummet.

Of course we were sensible and when we opened the trade on the FTSE we also put in a SL order at 3950. Now the SL will kick in as soon as it can, but and this something you should take note of: with an ordinary stop loss, it is NOT guaranteed that your trade will be closed at 3950. Normally a stop loss is traded close to that number, give or take a few points, because there is a delay between the quote hitting your stop loss figure and the system actually triggering it at current market price, by which time the market will probably have moved a few points. Believe me, a few minutes is as quick as we could ever hope.

However, if like in our example the trade is falling like a stone by tens of points a second, by the time the system has been triggered our SL (at 3950) the market could have dropped much, much further, resulting in a confirmed trade that is well below 3950. This obviously results in an even greater loss than what we had first expected. Which would be our expected loss of Ł500 plus what ever amount the trade had fallen between the few minutes it takes the FB’s system to acknowledge the closing order.

I am not saying this to freak you out, or to worry you in any way. I have never had any bad surprises like the above. Of course I have had a SL triggered and lost a few extra pounds than I had hoped, but nothing to warrant panic of any kind.

I have given you the above example so that you know what can or could happen if there was a massive swing in the trade. Don't get too preoccupied with the above though as most trades will close very near your stop loss, and if you stick to the more secure trades (any FTSE/Dow Stock or Indices) you won’t have to worry too much, perhaps unless there is a serious incident such as 9/11. If on the other hand, you decide to venture into the more volatile and potentially higher reward areas of financial spread betting (tech stocks and the like) then I would strongly suggest you use the following order on all your 'high risk' trades.

Guaranteed Stop Loss

The Guaranteed Stop Loss (GSL) works just like a SL order, the biggest and only difference is the price that you request the trade to be closed at, IS the price at which you will be guaranteed that it will be stopped at. The price for using a GSL is usually several points extra spread on the trade and therefore an increased cost to your for executing the opening trade. In a nutshell, it costs you more money!

With normal SL closing orders we pay for opening a trade with a spread (difference between the mid-price and opening price). This is where the financial bookmaker makes their money. It’s a common misconception that the bookmaker makes their money from those that lose. In fact the bookmaker in this case makes their money from the spread and it’s the money from those that lose that pays those that win. I have been asked many times in the past, if a bookmaker could close your account if you get too good. The simple answer is they would be stupid to do this. As the better you get at making trades and the more successful you become the larger trades you will make and the more you will make them. Therefore, more profit for the bookmaker.

The spread is no different if you open a trade with or without a standard SL closing order. However, should you decide to use the above GSL closing order, the spread will be much larger, PLUS you usually have to pay an additional few points on top of the trade too, much like an insurance payment. So you do pay quite a bit more for your trades using a GSL, but they will save you a fortune should things not go in your favour.

To be honest, I rarely use a GSL, simply because I rarely trade in highly volatile areas. Even when I do, I tend to know the market a little before I go in so know what to expect to a degree. However, for you I would recommend that if you decide to venture into volatile markets: ALWAYS use a GSL. It will save you much more than it costs in the long run. Remember, out of 10 trades we can realistically only expect to make a real profit on 4. The other 6 we can expect to be losing trades. Therefore if we are not clever with our money management and go for volatile stocks and markets without using a GSL, the losing trades will eat into the profit made from the profitable trades and possibly into our deposit/margin.

At the end of the day it is your choice how you trade and whether you use a standard trade on a 3 month contract or a daily with a GSL. I have a friend who has traded for many years and only uses GSLs. But by the same token he is a very careful trader and doesn’t like risk much at all.

We want to keep the risk down to a bare minimum. This means making choices based on our ability to read charts and some fundamental data, then making wise opening trades (entries) and being clever by using SLs, GSLs and locking in profit as and when we can. PLUS making sure the losing trades we have, lose little and make no significant impact on our overall profitability.

To recap then; use a standard stop loss (SL) closing order on less volatile markets & stocks (FTSE/DOW), do NOT set your SL order too close to your opening one, else you will get “stopped out” and lose money, do LOCK IN profit as soon as you can by moving your SL order in the direction that locks in profit (depending on whether you have gone LONG or SHORT), and finally USE a Guaranteed Stop Loss (GSL) when trading in highly volatile markets.

But always be mindful of moving in the stop too close to the current market value of that trade. This can get you stopped out very quickly indeed. Look at the 15 minute data of that stock over 1 day, the chart you should use for this is the FB’s own chart. It shows you the data they are using. Look using candlesticks (more about those later), and you will see where the stock is bursting up or down. You should aim to be outside of these limits over that day on your stop loss to protect yourself from being stopped out. It’s best to use this technique when moving your stop and will limit the amount of times that you do get stopped out.

Finally on stop orders. Don't use a GSL as an insurance on a trade that you are uncertain about. If you are uncertain, simply DO NOT MAKE THAT TRADE.

The tools that we are provided with by financial bookmakers, although very simple ARE very powerful and KEY to your success in financial spread betting. Use them and use them wisely. Abuse or forget them and you will fail, like the 90% of the mug traders who blindly trade and have no money management.

We have come quite a long way in a relative short period of time. Don't worry too much if none of it is properly sinking in yet. Understand that I was in the same position as you are now, but eventually I got my head around the fact that what I was learning to do was/is relatively easy. Remember, read the Workbook a couple of times, and with a few examples of your own, try your best to work out any problems yourself. You can of course email me with any concerns or problems that you may have. I am here to help you as much as I can.

You should now know what financial spread betting is and the basics of opening and closing a trade, in addition to the main tools that the financial bookmakers (FB) provide you with in order to limit losses and lock in profit. We have also made a realisation that the biggest mistake that most make is the incorrect use or lack of use of the tools that are given to us by the FBs.

Now don't go and think you can start trading just yet, or this is all we’re going to cover. What I have covered so far you could have easily learnt anywhere, to be honest. In fact there are plenty of books and courses that just talk about what I have gone through with you. What they tend to do though, is add a ton of padding to make the Ł20 that you have paid for the book, or the Ł200 for the course, seem good value - when all you would have probably learnt is what I have told you in about past pages. Thankfully, you are wiser with your choices than most.

Risk Exposure & Money Management

STOP LOSS

Locking In Profit - with a stop loss!

Locking in profit is paramount to your money management when financial spread betting. Always look for chances to lock in profit, it is one of your keys to success.

We have covered the stop loss, but one of the things you must be aware using a stop loss is the following:

Say we opened a trade on the FTSE100 at 4000 going LONG @ Ł10 per point. Something terrible happens which results in the FTSE crashing and within minutes it starts to plummet.

Guaranteed Stop Loss

Finally on stop orders. Don't use a GSL as an insurance on a trade that you are uncertain about. If you are uncertain, simply DO NOT MAKE THAT TRADE.

In an earlier paragraph I mentioned that you can pretty much trade in anything. The common assumption is that you can only trade in indices, but you can trade in virtually anything you wish. Over the next few paragraphs I shall be covering the main markets you can trade in and how these work.

Stock Index Futures:

We have covered these in some detail before: remember when I was talking about the FTSE100, the DJIA (Dow) and the Nikkei? Well all these and more, listed below, come under the umbrella of stock index futures. Basically they are an easy way to trade in a whole group of shares, instead of just the one share.

One important point you should realise that the current quoted price of the future may not correlate to that of the actual index. There are reasons for this as follows:

Index futures tend to have a natural premium built into them called a fair value premium which is above that of the index you are wishing to trade. This is because there is a natural financial advantage to trading in the future as opposed to physically buying the underlying stocks for cash, which is based on the interest advantage of buying the future on margin, an act that requires far less capital than buying the equivalent number of shares outright. Since interest rates are usually higher than any dividend payable on the shares, you stand to gain more interest from the money you save, by buying on margin, and this is reflected in the (usually increased) price of the future in question.

Future prices react to news and events much more quickly than the underlying index in question. Therefore the live price of the index you see on some sites and services may not tie directly with that of the index future.

Now I know the above was a bit heavy and like you, I sometimes have to reread the first one especially (and I wrote it LOL!). I have taken the liberty to tell you the above so you know. You need not worry about it much at all. As we always trade from the quotes that we receive from the FB, and the prices we use more than most are those that are supplied by the FB.

We only use online services to research trading patterns and trends in charts. We don't stress too much about the fact that the underlying price of the stock, index or whatever it is were trading doesn't match perfectly with the REAL stock quote etc. So don't feel that you are being ripped off by the FB if the prices don't match. In fact some FBs now allow you to chose whether you wish the quote to be relative to that of the actual Index or the FB's own book price.

At the current count there are 26 variants of stock indices that you can trade in. Now I know what you are thinking. I said that there were only 3-4 major league indices out and that is true. However, many of the indices break down the main index into parts, larger or smaller. For instance the FTSE can be traded in the following: FTSE100, Daily FTSE Index, Daily FTSE Futures, FTSE250 and so on. Essentially they are little different, except the larger FTSE250 comprises the top 250 companies and not 100. The daily futures can only be kept open for one day.

Daily Trades:

A quick word on DAILY FUTURES, simply known as Daily trades. These are trades that are designed to have a small spread, however, they only have a shelf life of 1 day of trading. So for instance if you traded the Daily FTSE Index - this is a trade which is quoted on the actual figure or as close as of the underlying and not like that of the FTSE Future mentioned above. You can open Daily trades during any time on the day. You must remember though that they will be closed at the end of that index’s trading hours. So the FTSE DAILY INDEX will be open from 8am to 4.30pm GMT. The trade can be opened and closed at any point during those times, but will be closed automatically as the trade expires at 4.30 GMT that day or at 9.30pm GMT for US trades.

Before you trade DAILY quotes, make a note of the times of trading relative to your own time. For instance I find it difficult to trade DAILY Quotes on the Nikkei because of the massive time difference between the UK and Japan. However, I can trade the FTSE obviously and the Dow as that opens mid afternoon and closes at night GMT. So look at the time differences when trading daily futures/quotes.

You don't have to worry too much by trading contract months. Only trade a daily if you are sure that the money you will save in the spread is worth the risk of the trade expiring within hours rather than weeks or months. A great deal of what you will be doing is based on common sense: it just takes a little thinking, that’s all.

One thing I would like to add and will become more apparent when you begin trading for yourself: most of the following trading products supplied by financial bookmakers tend to be Daily, Weekly, Monthly or the standard 3 month contracts. All FBs have the 3 month standard term contract, the same is true for the Daily contract. Some also offer a Weekly and Monthly contract. Others offer a Rolling contract, which to be honest I have never traded.

Rolling Trades:

Rolling bets mirror that of the underlying share price. Where as other trades tend to mirror that of the futures market. The price has a small spread built in which is usually much smaller than that of the daily and quarterly trades. Rolling bets are usually available on most of the common trades, mostly in the FTSE100, NASDAQ 100 and the DOW 30.

A rolling share bet is a daily bet that is automatically rolled over the next trading day. The trade is closed at 4.30pm (UK time) for UK trades and 9pm for US trades and automatically re-opened at the market opening the next day. This will continue until you either close the trade yourself or you run out of margin.

Time for an example:

You get a quote on stock XYZ at 345.7 / 346.8

Now this time you believe that the stock is going to fall so you go short and sell stock XYZ at 345.7 @ Ł10 per point on a Rolling bet.

In the place of a normal spread in this sell example, you will be paid interest for every day that you hold a position open.

The interest payable by the bookmaker varies but is around the following equation: (LIBOR 1 month – 2%)/365.

LIBOR is the current standard base interest rate. Multiply by the total underlying value of your position.

Using our current example we have the following equation applied to our trade:

((5% -2%)/365) x (Ł10 x 345.70)
= 0.0082% x 345.7p = 28p of interest paid to you daily.

However, if you held a long position instead, then you would of course pay interest to the FB. The rate for this is around (LIBOR 1 month + 1%)/365 per day. Rates can be found in the FB’s users’ manual. The rates will favour the FBs so that for the equivalent long and short position they will deduct more on the long than they add on the short.

Now it’s 4.30 on and market closes at 351 at the mid price. The stock didn’t fall as you anticipated and your current loss on your trading account is worked out as follows:
(Ł53 (351 – 345.7) x Ł10)

So in essence on that day of trading you have lost Ł53.00

The trade is automatically re-opened the next day at 351, with you trading short at Ł10.00 per point.

Now say the stock falls to the mid price at close of this new trading day to 337.5 the profit you would make would be approximately Ł135.00 depending on the true mid price at close.

Rolling bets do have some advantages; namely smaller spreads. There is a premium to be paid in interest of course if you are making that trade, which sometimes equals more than the spread on a standard trade on quarterly and daily trades. Again it’s down to choice. I have students that only trade rolling and those that do both or just quarterly trades.

Hourly FTSE & Wall Street Bets

One of the newer trades that can be made, and as of writing only available with IG Index – see list of bookmakers in a later section of the course.

The expiry on these trades is within the hour, that is essentially the only difference between that and any other trade on the FTSE or Wall Street. You can only trade those two at present, but I am sure as they grow in popularity, so will the range of trades that become available for Hourly bets.

They do tend to have smaller spreads than standard longer term trades on the same Indices. Personally I can only see hourly bets becoming useful for when the stock is reaching a ‘bounce’ and it was obvious that this was about to happen. I do feel though that an hour for one trade to expire is too short and trading these is really entering the realms of gambling rather than being able to capitalise on analysis.

Binary Bets (‘yes’ or ‘no’)

Another one of the newer forms of trade that we can make is a Binary. These trades can be placed on Shares, or FX (Foreign Exchange – money to you and me) quotes.

They are similar in style to that of Fixed Odds trades, with the ability to limit your risk with a fixed return on particular outcomes to that trade, such as the FTSE to be down on the day or the DJIA (Dow) to be lower at the close. As with most trades you can close the trade early whenever you like.

How Binary Bets Work.

It’s actually relatively simple as there are only ever two outcomes which are either ‘true’ or ‘false’ or depending on your way of thinking, ‘yes’ or ‘no’. Let me explain.

Say you open a Binary Bet for the FTSE to close up (be higher than its opening price) on the day (close of business at 4.30pm), there are two outcomes as follows:

The FTSE closes up on the day, the bet will settle at 100.
The FTSE fails to close up on the day, the bet will settle at 0.

You either win or lose, there is no grey area of making a few points of profit or indeed a spread. The key difference between making a Binary bet as apposed to making a Fixed Odds bet, is that you can close the Binary Bet when YOU want. With Fixed Odds you do have to wait for that trade to expire. Which means you will be either able to cut your losses or take profit early without having to wait for the market to close. As the spread betting company (or broker or bookmaker – depends what you want to call them) tend to quote a continuous price, similar to that of spreads.

As the prices are quoted continuously you can decide to go long or short on any price that is quoted. Binary bets tend to fluctuate quite a lot, especially prior to expiry but you are safe in the knowledge that you know you risk exposure and your possible reward.

The type of Binary Bet that you can place are as follows:

Up/Down:
Quite simple really, you either decide if the market is going to be up or down on the close of business that day.
Range Forecast
Range bets simply have two prices that create a lower and an upper range which will create one out of two outcomes.
I have taken the following from IG Index`s website as it’s a good example of how a Binary works. Other sites have tended to make it sound too complex.

Example: ‘buying’ a FTSE 0/–10 Binary

It is 4.17pm, and the FTSE 100 Index currently stands 11.6 points higher than the previous afternoon’s official closing level. You are not confident that the FTSE will be able to hold on to the days gains, and see that our price for a Binary bet on the FTSE finishing down by 0 to 10 index points is 6.6/9.2.

So you buy the FTSE 0/-10 Binary for Ł20 at 9.2.

At this point you know precisely your maximum potential loss: if you are wrong and the Binary makes up at 0 you will lose 9.2 x Ł20 = Ł184. You also know that if you are right your return on the bet will be (100 x 9.2) x Ł20 = Ł1816. This represents nearly a 1000% return on your risk, decided in the next fifteen minutes.

Eight minutes later, the FTSE has dropped back slightly to 2.4 down on the day, and our quote for the FTSE 0/-10 Binary has risen by over 40 points. You think there may be some more market shifts to come, and decide to take your profit now. You close out your bet at our bid price of 48.8.

Your profit on the trade is:
Closing level 48.8
Opening level 9.2
Difference 39.6
Profit: 39.6 x Ł20 = Ł792

You were right to be concerned, as the FTSE returns to positive territory in the final minutes of trading, closing 6 points up. The FTSE 0/+10 bet settles at 100 while all remaining Binary bets in this package settle at 0. By taking your profit early you have made a 430% return on your risk, and all in the space of a few minutes.

Binary bets do have a place in our trading arsenal and are a welcome addition to the products that we can market. Predominantly, Binary trades are good for trading ‘bounces’, I will be explaining what a bounce is much later in the course, but for now, a bounce is simply where a stock reaches an excessive position whereby we can judge to a good degree when the stock will ‘bounce’ up from a position, or down from a position. This style of trading is best suited to volatile stocks, trading over a very short term period, generally less than a day.

I will be explaining more later in the course and showing you how to take advantage of all the differing tools that you have at your disposal. As well of course as covering the techniques that we use to spot the trades in the first place.

Individual Shares

Trading in individual shares must be the most favoured trading product available. Hasn't been around that long, seven years or so when IG Index realised that there was a great deal of demand for trading in shares within the FTSE100.

The shares that you can trade now are vast and varied. All the FTSE100/250 is there, most major and some minor US shares including NASDAQ and technology shares.

The good news about being able to trade individual shares is that they are no different to trading the indices. The gearing is the same throughout all the products available to you (options however differ but I wont cover those here as they are very complex).

There are plenty of benefits trading in shares. Let’s use Microsoft (MSFT) as an example. These shares are currently in the region $55.00 per share. By share I mean standard share certificate, owning part of the company. However most people buy shares do so as a long term investment of 2 to 3 years, and look to make a profit over that period.. You would need a great deal of money to buy even just 100 shares, around $5,500 in fact. Now if we bought the real share we'd have to pay this $5,500 and be out of pocket of $5,500 and now if the share rose up 10% to $60.50 and we sold we would get $6050.00 that is great. BUT! We might have to pay TAX on the profit as it’s classed as a capital gain. Also, we would have to pay the broker a fee to buy and to sell, plus the $5,500 we put in isn't available to us while invested.

Whereas if we opened a spread trade, we don't own the share and we could have made anything from 1p to Ł500 per 0.01p price movement. At Ł1 trade going long we would have made the same profit, but would have kept it all as financial spread betting is tax free and we don't pay our financial bookmaker. Plus, were risking far less, not putting thousands of pounds into one share, our position is highly fluid, can easily be closed. Finally, we could have geared up our position by adding more to the trade as it went up. We could have started at Ł1 per point then moved to Ł10 easily and instead of making $550 we would have made $5,500 instead - for the same amount of work.

Not to forget to mention that the biggest difference between trading in REAL shares and owning a part of that company and trading in financial spread betting, is that with financial spread betting we can make a fortune when the price of ANY share, indices and many other financial products go DOWN. It does make me realise why people really look to make money from shares in the short term.

My changing currencies may confuse some of you. My local currency is the GBP Ł, but the example I gave was Microsoft who are American and therefore quoted on the S&P500 (Standard & Poor’s 500 - another index). You don't have to worry too much about trading in differing currencies. Everything is worked out for you. When you open most financial bookmaker accounts, you can decide the currency you wish to have your account shown in and therefore be trading in. I personally use GBP Ł but it doesn't matter if you choose the USD $ the AUS $ or whichever currency you feel comfortable trading in.

One other thing I feel I need to mention. I tend to concentrate on the FTSE100 to 350 and also the US markets. Now before you start worrying, it makes no difference where you live as to what trades you make, whether they are FTSE, DJIA, and NIKKEI. They are all just trades, it doesn't matter which sector, indices or share you or I concentrate on. Therefore you will notice within that on my website I will be looking at the FTSE, however, I do make frequent visits into the S&P500 and the NIKKEI. Basically, don't be alarmed if you see a great many FTSE100 shares in my student website, or swings from FTSE100 to S&P500. I try and keep an eye on as much as possible, but it makes sense to spot trends in the FTSE or S&P as these are the ones I know the most about.

The other advantage on individual share prices is that there is more information available to you than would be on any other trade. Simple when you think about it. As all the others are either indices (a massive collective of companies), sectors (companies within a particular industry grouped together), or commodities (gold, wheat, sugar etc.) and so on.

Granted, our main concern is with technical analysis, therefore we rely mostly on data supplied in chart form. It is always nice to look at the company’s financial data, their profits and maybe even some of their products on the company’s own website. Plus, companies create news from press releases etc. Whereas indices only make news if they reach a high or low and the same goes for sectors, as these are parts of an index. Commodities make news only when there is price rises in oil, gold etc. There are charts obviously but little news.

You have to remember and it is quite easy to forget. That commodities and indices are traded as futures contracts (not real futures contracts but based on them in terms of pricing and contract periods). So these are based heavily on greed and psychology – traders constantly second guessing where that market is going to go. If one company goes belly up in the FTSE, it won’t have a massive effect on the overall index. This greed and fear is what fuels the index future and that is why they are so volatile and fluctuate a great deal. Shares on the other hand tend not to fluctuate as wildly and it's easier to trade in my opinion using technical analysis, there is a reassurance that the share will gently follow the trend in the chart. Unlike an index, which tend to swing more and therefore there is greater risk of getting “stopped out”. All in all, I prefer individual shares to trade because it is easier to find information about them, they’re relatively stable in following a trend and the fact that I can easily get a gut feeling about the company based upon what we have already surmised.

Therefore trading in singular shares has become one of the most common products within financial spread betting, because of the ease in gathering information, the ability to quickly gauge how that share is performing and simply because that most of us are familiar with the companies quoted as they are house hold names.

A quick note about US shares. US stocks do tend to swing much more than those on the FTSE. This is simply because of the high volume of trades, which creates their more volatile nature. There is a great deal of money that can be made from trading US stocks, and they are good for spotting ‘bounces’ as their high volatile nature makes them prone to swings in fortunes. It’s not unheard of for a stock in the US markets to drop several hundred or more points in one day. However, to trade the

markets you will need more margin (deposit with your bookmaker) to cover the trades. Because of the nature of the US markets and the fact that they do indeed swing much more than that of the UK or EU markets, the bookmaker (broker, financial company call them what you will) will ask for a higher amount of margin to cover the trade.

Personally, I feel that if you’re just starting out with spread betting and you have never done anything like this before, it would be advisable to start of with just placing UK trades to begin with, then moving onto more volatile forms of trading – US stocks, Commodities and the FX markets as your experience grows.

Right let’s move on. I gave an example previously of purchasing an actual share within a company – remember in this case you actually own a fraction of the company. Perhaps the most important and key aspect and the largest negative are; if the share drops, so do your profits. There is no possible way to trade in real shares and make money when the markets fall, much like they have in the past and will do over and over again in cycles – as an aside; for those interested in spotting these cycles in markets there is an additional tutorial on the student website in Elliott Wave analysis, it’s well worth a look.

Where as with financial spread betting, we are in the incredible position to benefit greatly when markets fall. In fact as a trader in financial spreads, we are in the excellent position of taking advantage of negative markets (going SHORT) and making money quicker than we could from a rising market. Why? Because shares fall more quickly in the same period of time than they rise when in an up trend. Think about that for a moment.

Why do shares fall faster than they rise? When shares go up, it involves people, institiutions actually physically spending money. Money is limited, even in huge institutions. Therefore, the share can rise from buying (supply & demand) and continue to do so until the money dries up or simply no one wants to buy. This is slow, sometimes there are panic purchases which cause 'spikes' or 'breaks' in charts (where the price has shot up so quickly that there is a break or spike in the chart) but money, interest, demand runs out.

Where as when the share drops. You have the entire shareholder stake at risk. There are the people who have recently bought the share and the people and institutions that have had the share months, years and sometimes decades. Who are maybe selling. This is why shares fall quicker. Selling causes panic, word spreads around and before you know it the share price has fallen through the floor. Mini versions of this happen every day, some greater than others. More so in fact in US stocks.

To those that trade shares, this is a sad inevitable fact that you lose money quite quickly when shares fall. Spread traders on the other hand can't wait for shares to fall and that is part of the reason why spread traders have had a good couple of years recently. The Dot Com crash made many spread traders millionaires, whilst it left many share dealers broke and crying in their beer.

However, and this is another reason why most people involved with financial spread betting lose money. Most traders within Financial Spreads, never trade going short. Yet this is the most profitable trade you can make. You will make more money trading short than long. Obviously prevailing markets have a strong say in what you do and I for one whilst placing my analysis up on my website will aim to have a balanced SHORT & LONG trades view for you to monitor.

Sadly though most traders only trade going LONG! Why? It's down to psychology. For years we are taught that you can only make profits from shares if they go up, most traders think when trading in financial spreads that they physically own something when they don't. I am not saying they believe they actually own a part of the company, but the underlying psychology suggests to the individual that they have a real stake and therefore should seek stocks that are rising. A lot of the time the people that get involved with financial spread betting have come from a "purchase & hold" share buying background, so they are conditioned to only pay attention to rising markets. It’s a way of thinking, we are taught that from a early age you can only make money if something increases in value, not drops.

They also tend to use the same strategy that may have worked well in a rising market with actual share purchases, but may not on the other hand work that well with open financial spread trades.

Now I am not telling you to always trade SHORT. I want you to learn that you can trade going LONG or SHORT. The key point is that you are aware that there are other means to making profit and they don't require that trades or stocks are going up.
DON'T MAKE THE MISTAKE OF MOST!

The next few pages I will be pointing out the other products that you can trade in. However, it’s not important that you do trade in these products, as ever it is your choice.

My aim over the next few pages is to give you some good knowledge on these so when the time comes you understand how they work and what profits you can expect to see from trading them.

Please be aware that on my student website I concentrate on individual share trades when I analyse the charts and show the videos. I will from time to time point out good opening trades within that of the indices or commodities. For the most part though I will be supplying you with information that will allow you to successfully trade in share financial spread betting and become a great learning tool.

From there I will begin to talk about the actual strategy for trading. What tools I use and most of all why I am using that particular tool or technique. My ideal belief is that you will know exactly what to do after you have spent some time reading through the coursework and perhaps following trades on my website.

Paper Trading:

There are now many brokers that will allow you to open a ‘virtual’ account. These accounts are a great learning tool. As you will be using the same tools, the same trades, the exact same information that you use when you begin trading real money. However, with ‘virtual’ money it’s easy. We know that it is make believe. Believe me, to make the same trade using your own hard earned money is very different indeed.

So don't forget! The next few pages are just an outline of what products you as a trader can trade. They vary from financial bookmaker to financial bookmaker. Some have better spreads on trades than others, some companies will not deal with some of the products I am mentioning. I do believe though that knowledge is power and you can then benefit from this knowledge.

Trading Financial Sectors

What are sectors?

Sectors can be seen as collectives of companies that represent a particular market, for instance British Telecom, Telewest etc. all come under the sector called Telecoms within the FTSE350. HSBC, Barclays Plc would come under Banking within the FTSE100 as would Wells Fargo come under Banking within DJIA. There are many sectors that I will list at the end of the section, you maybe surprised at how many there are. Most financial papers like the Financial Times, NY and London issues, have sector listings within the back of them. Also most if not all charting packages allow you view sector performance in chart form, and to break down which companies that appear within each sector.

Why have sectors?

Its all well and good having lists of the top 100, 250 or 350 companies within either the US, Japan or UK. Which give a generalised view of the top performing companies in once snapshot such as that seen by the FTSE100, which shows as a collective how the top 100 companies within the UK are performing.

However, the companies that are within the FTSE100 consist of varying companies who have very differing markets. So to get a tighter view on particular markets, we use sectors to show how a market sector (group of companies that share a market type) are performing.

Having these separate market sectors allow us a snapshot view of that sector and act as a large barometer of that sector. Ability to read and connect sectors allows you to possible use this 'Fundamental' analysis to gauge what the price movements in one sector may have a reflection to another.

Remember in an earlier example, I gave the commodity oil a mention: it comes under the Oil & Gas Sector (no prizes for guessing that one). In that example we could follow use that market sector price rise to gauge an effect within other sectors, namely Transport, Engineering & Machinery, Electricity as an initial knock on effect. If prices continued to rise within the Oil & Gas markets, then these in turn would affect prices in Electronic & Electrical Equipment and other retail markets. Would it have a positive effect if price rises in the Oil & Gas Sector went up? Not at all, it would decrease profits within the knock on effect markets and therefore, if you were trading in say Transport as a market sector, you would look to go SHORT in the medium term on a 3 month contract. We shall be looking more about trading strategies later in the Workbook.

The contract lengths for Sectors range from Daily to Quarterly only. I have yet to see any financial bookmaker having weekly contracts. In fact weekly contract generally are quite rare within financial bookmakers. Some bookmakers are offering Rollover trades (Rolling trades) but you know my view on Rolling Trades.

Other than giving you the ability to view a group of companies as a sum of the whole index linked to a market type, there are no fundamental differences with trading this product. Just take note of the knock on effect that other market sectors have on others. I believe that is the biggest lesson to take from this part of the workbook.

MARKET SECTORS:

Aerospace & Defence
Banks
Beverages
Chemicals
Construction & Building Materials
Electricity
Electronic & Electrical Equipment
Engineering & Machinery
Food & Drug Retailers
Food Producers & Processors
Forestry & Paper
Gas Distribution
General Retailers
Health
Household Goods & Textiles
Information Technology Hardware
Insurance
Leisure, Entertainment & Hotels
Life Assurance
Media & Photography
Mining
Oil & Gas
Personal Care & Household Products
Pharmaceuticals & Biotech
Real Estate
Software & Computer Services
Speciality & Other Finance
Steel & Other Metals
Support Services
Telecommunications Services
Tobacco
Transport
Water

Looking at the above market sectors it is easy to see which market sectors would have a knock on effect to another. Some sectors such as Oil & Gas would have a knock on effect to most areas.

Currencies

Trading in currencies within financial spread betting is somewhat different to the other trades that you are used to reading about so far.

Currency bets are usually divided in to two type of trade:

Spot currency bets, which are predominantly used for short, term trading such as intraday trading.

Forward currency bets (including bets on the Chicago Mercantile Exchange known as CME currencies) are ideal for those wishing to trade in the longer term on currencies. The usual trade is that of the standard quarter contract much like that of other trades we have talked about before. However there are other key differences that make trading in currencies different and therefore more interesting to trade.

Please take note of the following key differences:

Which way round the currency is being quoted
The currency your trade is being denominated
The size of your transaction in the foreign exchange market, which is the equivalent of your bet

How to know which way round you are betting?

When you trade in currencies, you don't open a contract on one currency market, you open a contract on whether a particular currency is either going to strengthen or weaken against another. You never just trade a single currency. It has to have something to pivot against. For instance you may wish to trade in the EURO/US Dollar, which is a trade that means that the EURO will strengthen or weaken against one another.

So how do you determine which direction you are trading?

Well if you wanted the EURO to strengthen against the US Dollar you would look for the following quote EURO/US Dollar and the type of trade you would look to make would be a LONG trade.

If on the other hand you were expected the USD to strengthen against the EURO, you would once again look for the above trade. However, the type of trade that you would be looking to make would be SHORT.

It depends how you wish to look at it. All you are simply saying with the above opening trades is that you either believe the EURO will go up LONG or down SHORT in relation to that of the USD.

At first it can be quite confusing, which is why it is best that you get used to trading normal stocks, before moving to the currency markets.

In which currency is your bet denominated?

The usual denomination to which your trade in any currency is converted back to is either the USD $ or GBP Ł (Sterling). Dependent upon which denomination you wished to be key when you opened you trading account.

However, some financial bookmakers ask you which denominating currency you wish the trade to be closed in.

For instance if you were to be trading the Swiss Franc/US Dollar, you could with some financial bookmakers, request when opening the trade that the currency upon close be converted into Swiss Francs, regardless of whether you had opened the trade LONG or SHORT.

Why do this? For smaller bets, the chances are the denominating currency will make little difference to the overall amount you receive. However, should you be in the enviable position to be trading above and beyond Ł10,000 then the exchange rate of one currency to another maybe more favourable to that of your own.

You need not worry too much about it here. I am telling you this so that you have a clear understanding of how currencies work. Who knows you, maybe in that enviable position of trading thousands where that extra few cents/pence make a great deal of difference. Institutions mainly use the above choice of denomination.

How big is your trade?

We need to be clear what a 'point' represents in currency trades. A 'point' is the last figure that you are quoted when you open a trade (some currency trades are 4 or 5 figures). If you were quoted Euro/US Dollar Ł10 per point 8490/8500 and you went LONG - for each point (single number movement up or down) your trade went up.

Let’s say you closed the bet at 8515 (which could have been only seconds later if trading intraday) you would have made Ł150. As you opened the trade at 8500 and closed at 8515, which is a 5 point difference. The same calculation works in the apposite direction for SHORT trades. If you went short thinking the EURO would weaken against the Dollar and opened a trade SHORT Ł10 per point at 8490. The Euro weakened and went down to 5450. You would have made a 40 point difference and a comfortable Ł400 profit.

Interest Rates

Believe it or not you can even open trades on interest rates. In fact the there are more and more products entering the market every year. It makes my mind boggle as to what they will add next. It's all very good news for us, as it supplies us with an added means of making money from a financial movement in a particular product, old or new.

Interest rate trades may seem a little strange at first, but stick with me and they will soon make sense. Just remember that the trade works just the same as they have before - BUY (LONG) SELL (SHORT) etc. and you profit is the difference between you opening and close prices.

The key difference you have to realise and take note of regarding interest rates is what the prices quoted to you actually mean. At present there are two differing trades that you can open with most financial bookmakers.

Short-term Interest Rates (STIRs):

A short term interest rate trade, allows you to open a position on the direction of various countries' 3-month interest rates.
If you plan to trade interest rates, its obvious that you start trading your countries own interest rate, as news on your local interest rate is quick and easy to come by. Most daily newspapers, TV etc. have the local interest rate available at hand. Remember though to use this as a guide. As the trading with which we are involved is linked to that of the futures markets and therefore they are more volatile.

The price of the contract that is opened is the number 100 minus the actual interest rate figure. Therefore a price of 94 signifies that the interest rate would be 6%, a price of 97 would mean 3% and 100 would obviously mean that there is no interest rate at all, which unsurprisingly I've yet to see.

If you think the interest rates will fall you simply BUY, go LONG and if on the other hand you think that the interest rates are going to up you. That’s correct... you SELL go SHORT on the trade. Simple really.

Dealing in interest rates is very similar to dealing in Gilt Edged securities. Isn't it funny that when we hear these terms, they sound so difficult that we assume trading in them would be incredibly difficult. Yet as we have proved over and over, the banks want you to believe that in order to help them keep their jobs and impose their charges.

Let’s look at an example just to clarify:

If we take UK interest rates as an example, if only because they are my local interest rates. The trade can be any interest rate you chose from any country, regardless of your location.

We believe that the short term interest rates will rise so that the price of 3 month sterling deposits (sometimes called short sterling) will fall in value.

Therefore we decide to sell go SHORT on 3 month sterling deposit (because interest rates we believe will rise, interest rates rise value of UK currency falls as becomes less attractive globally). The quotation we receive on sterling deposits are minus the decimal point 9030/9070 (first price is SELL (SHORT)/ second is BUY (LONG)) We decide to go SHORT/SELL at 9030 on March short sterling at Ł10 per point. The price of interest rates rise, the values of sterling deposit futures fall to 89.90 and we buy to close the trade. Which works out at a 40 point difference between our opening (9030) and closing prices (8990), equivalent to a Ł400 profit.

Remember the price that we get quoted on is not the interest rate itself. It is on the local currency value, e.g short sterling UK, going up or down as a reflection of the interest rate change. I told you they can be a little tricky.

Long-Term Interest Rates

Now just to make things a little more confusing for you, I am going to throw long term interest rate futures at you. Long term interest rates are reflected in the price of government bonds. Government bond futures allow you to trade on the long term rise or fall of interest rates from around the globe. All you have to remember is that BOND prices rise when interest rates fall and vice versa when interest rates rise and bond prices fall. So we either buy (LONG), or sell (SHORT) on that particular country’s bond.

An example would be useful again, I think:

We believe that interest rates in the US will fall and therefore the US T Bonds will rise as result. So we decide to go LONG on the US T-Bond March contract.

Now I don't want to freak you out here, but T-Bonds are quoted in fractions - no I don't like it either. So we get a quote of 98-20; which works out as 98 & 20/32nds. We get a quote of 98-17/98-23 so we go LONG at 98-23 @ $10 per point.
The interest rates fall, T-Bonds rise in value and we sell at the quote of 101-11/101-17 closing the trade at the sell to close point of 101-11. Working our profit out is simple:

Opening Price: 101-11
Closing Price: 98-23
Profit 84 32nds = 84 x $10 = $840

Now I don't want you to think that this is becoming way too hard. I am just showing you the various markets that you can trade. You can also trade options but I won’t go into those, leaving them for another time. Your main 'bread and butter' will be earned trading using share prices, which are quick and simple to trade and follow. The other trades I am listing here are merely for your reference, so when you invite your bank manager around for dinner in your new house, you can sit smugly as he tries