Articles
Spread Betting Guide
by Stu Whisson - Jan 9, 2006
8.4 (from 67 ratings)
What instruments can you Trade?
A quick note about US shares.
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.
Author
Page 1
Stu Whisson
Stu Whisson is the Managing Director of Insight Support, Ltd.Copyright © 2001-2008 Trade2Win Ltd.
