Day Trading with Spread Betting
Spread betting and day trading using spread bets, is a high-risk high-reward, and tax-efficient way of speculating on the markets. From trading platform, to how to trade and trading strategy, this page will break down everything you need to get started intraday spread betting and online trading.
Spread Betting Brokers
What Is Spread Betting?
Spread betting is a relatively straightforward method of trading that grants you access to a number of global markets, all through one broker. You can start spread betting on the following:
- Commodities (gold, silver, aluminium)
- Cryptocurrencies (bitcoin, ethereum, ripple, litecoin)
You never actually own an asset when you’re spread betting. Instead, you are simply shadowing the underlying asset you are trading. Investors are speculating as to whether the security’s price will rise or fall, using the prices put forward by the broker.
Spread betting reviews in the UK often brand this type of trading as simply gambling.
However, this is not entirely fair. In the UK, this is an instrument that is fully regulated by the Financial Conduct Authority (FCA).
Switched on spread betters and traders will hone their craft and trade with a similar attitude to those day trading stocks, futures and other traditional instruments.
How Does It Work?
You trade instead of just laying a bet. Then once the bet is live you will hold your position until the opportune moment arises.
Spread betting firms will offer you a prediction (spread) of where they think a certain share or index will close at a specific time. You will then trade (bet) on the accuracy of that estimation.
So, if you think the prediction is too low, you could ‘buy’ on the price. Alternatively, if you believe the spread is too high, you can ‘sell’.
Spread Betting Example
Let us say that Waitrose opened the day at 325p and you want to trade on short-term movements in their shares. You may see a broker quote 325p to 326p (the spread). However, you believe the share will finish higher, so you buy at £100 per point movement at 326p.
If, at the end of the day Waitrose ends at 330p, that’s four points higher than the firm’s buy price. So, you’d win £400. On the flip side, if Waitrose finished the day two points from the buy price, at 324p, you would have to cough up £200.
Advantages of Spread Betting
Why do an increasing number of people look to make a living spread betting? For several very good reasons. All of which are outlined below.
- Tax-free – All gains from day trading spread betting are tax-free. Whilst speculation over price movements via buying and selling shares will open you up to potentially significant tax obligations, spread betting is free from any and all tax, including capital gains and stamp duty.
- Minimal capital required – For a large outlay you need far less capital than trading with traditional instruments. Going back to the Waitrose example above, you’d need tens of thousands of pounds to achieve the same exposure.
- Regulation – Spread betting is regulated in many countries, including France, Germany, and the UK. This affords you certain rights and protects your money from a range of situations. Not to mention, regulation keeps you safe from spread betting scams.
- Access – Spread betting gives you access to numerous global markets. From stocks and cryptocurrencies to equities and interest rates. You also have the ability to trade 24 hours a day, so you can fit spread betting around your lifestyle.
- Commission-free – Day trading costs can quickly rack up if you’re making a high number of trades. However, spread betting usually comes without commission fees. Instead, costs are included in the spread.
- Leverage – Plenty of brokers offer leveraged trading. This allows you to borrow capital to increase your position size. This could significantly increase your profit potential. The downside is that it can also magnify losses. Therefore, spread betting without leverage is considered far safer by many.
- Arbitrage or Hedging – Combining spread bets can lead to opportunities ‘arbing’, or allow trader to ‘hedge’ other derivative holdings.
Spread betting full time as a job could well be worth your while if the following sounds like you:
- You want access to a diverse range of asset classes.
- Keeping profits free from tax is important to you.
- You would like to be able to trade on markets that both rise and fall.
- Sticking to trading in sterling is important to you, even if you’re speculating on international markets.
- You want to benefit from reduced sizes on share deals, all without having to pay a minimum commission.
Risks of Spread Betting
Despite the long list of spread betting pros, there also exists several cons you should be aware of:
- Loss potential – If you don’t manage your risk and positions properly you can suffer significant losses. If you’re trading on margin these losses can exceed your initial investment. Nobody wants to receive a margin call from their broker demanding additional capital. Brokers must now publish ‘risk of losing’ percentages prominently so ensure traders are fully aware of the risks.
- Addiction – If you overtrade you can quickly find yourself in a spread betting nightmare. If this does happen, you are effectively gambling instead of trading.
- Expensive bid-offer spreads – Firms make up the money they lose through zero commission fees with expensive bid-offer spreads. That’s why some of the best advice is to shop around and find a competitive broker at the beginning.
- Legality – Is spread betting definitely legal in your country? It is legal in Canada, for example, whilst being strictly illegal in the USA.
As appealing as it is, spread betting to make a living isn’t always straightforward. So, the most successful spread betting winners are those that go in with their eyes open to the dangers.
Spread Betting vs Share Trading
Some people rightly question why you’d opt for spread betting over the more traditional share trading. With share dealing, you purchase a physical number of a company’s shares, e.g. Apple, and sell them in the hope they have increased in value to make a profit.
However, you can only turn a profit if the share price increases.
With spread betting, you can enter positions on any price movement on a company’s shares. You can place a spread bet trade on a plummeting share price.
This is known as ‘going short’, or simply a ‘short’ . With traditional share dealing, you simply do not have this option.
Also, you do not own the actual shares with spread betting (they are a derivative). This means it often requires far less capital.
This makes spread betting ideal for beginners and those with limited capital. So, if you’re considering spread betting vs stock broking, binary options, futures trading, or long-term investing, you’ll often find the former is often an attractive proposition.
Spread Betting Terminology
Below is a spread betting glossary, where you’ll find a breakdown of all the essential jargon.
- Bet size – This decides how much you will stand to make or lose for every point of movement in the price of your market. It is also known as stake size.
- Spread/Bid/Offer spread – The financial spread is the difference between the buy and sell price for a particular bet. The spread will usually be based on live market data.
- Controlled risk bet – This is when you limit your maximum loss through a guaranteed stop. This could be triggered by a major news event, for example. This will prevent you suffering a much larger than expected loss. You will normally pay a premium to place a controlled risk bet.
- Down bet – This is when you place a spread bet with the anticipation a price will fall for a financial instrument. For example, if you believe the price of aluminium is going to plummet, you’d place a sell bet at the bid price.
- Up bet – You’ll place an up bet on a market when you think the price will climb. For example, you’d place an up bet in the UK FTSE 100 or 250 market if you think the FTSE price will rise. You will buy at the ‘ask’ price, which is the higher price of the quoted spread.
- Expiration – The expiry date is when the bet will close. On expiration, your bets will be settled at the relevant closing price and specified time.
- NMS (Normal Market Size) – Today it is more commonly known as Exchange Market Size and represents the exchange-specified quantity of shares that a spread betting market maker is compelled to quote a two on, in a certain underlying market.
- Slippage – This represents the difference between the level of a stop order and the actual price it is executed. Slippage can take place during periods of high volatility. A guaranteed stop, mentioned above, is an effective way to prevent slippage.
- Duration – Some spread bets will have an expiry
If you’re going to start spread betting for a living you’ll need to get familiar with all of the above terms.
How To Start Spread Betting
Before you can start cashing in those huge payouts you need to follow the steps listed below to get set up and start trading.
Choose A Broker
Your broker will be your gateway to the market via the trading account. They will facilitate your trades and their platform is where you’ll spend numerous hours a day. However, with so many brokers offering a similar service, what should you look for?
- Price – How competitive are their spreads compared to others? Some companies specialise in certain markets with low prices. However, they will then offer other markets at less attractive prices, just to ensure they have a presence. Specific spread betting forex brokers may offer you a better deal than a jack of all trades, master of none firm. So, do your homework and check you’ll get the lowest spreads in the markets you’re interested in.
- Requirements – Make sure their margin, minimum deposit requirements and position size stipulations fit in with your financial situation. You don’t want to choose a broker whose minimum requirements will quickly see you out of the game if you lose the first few trades. For example, equities often require 10% margin. So, if you’re a high volume trader you’ll need significant capital.
- Features – Does the exchange offer all the stops your strategy requires? For example, do they offer guaranteed stops and limit orders?
- Markets – Does the spread betting firm offer the markets you want? Exotic currency pairs might be an issue for example.
- Customer service – Will you get rapid assistance if you encounter any problems? Will it be via online chat or the phone? Some providers offer 24/7 support, in numerous languages. So, check reviews first. You don’t want to be sitting in the dark for hours losing money because of a technical glitch on their platform.
- Regulation – Make sure they are properly regulated. They will be legally obliged to protect your capital.
- Tools & resources – Do you get access to free and easy to use trading tools and charts, such as volume indicators? Research materials and news feeds will also prove useful. Some spread betting brokers offer trading on MT4, for example, which is reliable and full of useful features.
- Bonus offers – Does the broker offer deposit and account opening bonuses? Do they offer any other promotions, such as reduced holding costs? Any welcome bonuses are worth considering.
For more guidance and a brokers comparison, see our brokers list.
Place Your Trade
Once your spread betting account is set up and funded, placing a trade is relatively straightforward. You will need to do the following:
- Choose your market – This could be the Dow Jones, Dax 30, Vix, S&P 500, Brent Crude Oil, Nasdaq, penny stocks, forex, futures, etc. The best spread betting platforms for beginners offer a range of markets for you to try your hand at.
- Decide on price direction – Do you want to buy or sell?
- Choose your position size – This is your stake per point, or bet size. Make sure this fits within your money management system. You don’t want to risk too much capital per trade.
- Decide your price levels – This is your entry level, profit target and stop-loss targets. All will help you stay within your strategy and prevent emotions leading you astray.
You can be the smartest person in every room, but without an effective trading plan, spread betting isn’t worth it. Fund your account without a well planned strategy and it won’t be long before that account is empty.
So, regardless of whether you’re using scalping or moving averages, what makes a successful strategy?
Charts & Patterns
If you’re looking at historical data to predict future fluctuations, then you’re probably going to use charts and patterns. Conduct a thorough broker comparison to make sure their charting tools will meet your requirements. Most platforms today offer all the standard bar, line, and candlestick charts, plus a range of signals.
Some of the more advanced platform offerings will give you additional graphs and features that allow for smarter pattern detection. If you can create charts that paint a clear picture of where the price has been and where it is going, you’ll have that all-important edge over the rest of the market.
If technical analysis strategies like trend reversal, breakout trading, and momentum techniques don’t appeal to you, then you can always buy and sell based on news events. Big corporate moves are often the catalyst for a round of spread betting.
Let’s say, Facebook declares a dividend, which subsequently expires. Some switched on individuals will monitor Facebook’s annual general meetings (AGM), to stay ahead of any potential dividend announcements.
For example, let us pretend Facebook stock was trading at £100 and it declared a dividend of £1. The share price may then start to increase to the level of the dividend. In this example, around £101. You would take a position before this announcement to profit from the price jump. If you took a position of 1,000 shares at £100, with £10 per point move, you’d gain £1,000 * £1 * £10 = £10,000.
Entry & Exit Points
An effective spread betting strategy balances profit-and-loss levels. Let’s say Ralph, a trader, wins four spread bets out of five, with an average win rate of 80%.
Ralph also has a friend and fellow trader called Charles, who wins two spread bets out of five, giving him a 40% win rate. It may appear that Ralph is the more successful trader, but this is not necessarily the case. For structuring your bets with advantageous profit levels can seriously enhance your performance.
Let’s say Ralph has taken the position of receiving £10 for each winning bet and losing £40 per each losing bet. Even with an 80% win rate, Ralph’s profits are cleared out by the £40 he loses for just one wrong bet (0.8 * £10 – 0.2 * £40 = £0).
Whereas Charles, takes £25 on each successful bet and drops just £5 per losing bet. So, even with his 40% win rate, Charles will still make a £7 profit (0.4 * £25 – 0.6 * £5). Despite losing 60% of the time, Charles still ends up the winning trader.
An effective strategy, therefore, means more than a high win rate. It requires a system that balances your profit-and-loss levels with your average win rate to consistently stay in the black.
For more guidance and shares strategies, see our strategy page.
Whether you are considering spread betting on currency or any other markets, you can use the above as an effective beginners guide for getting set up.
Spread Betting Tips
Never Stop Learning
As Paul Tudor Jones pointed out – “The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.”
Markets change, as do financial instruments. If you want to stay ahead, you need to change along with them. Fortunately, there exists a multitude of spread betting resources out there. To name just a few:
- Books & Ebooks
- Videos & tutorials
- Blogs & forums
- Online instruction guides
- Magazines, webinars & online courses
Whether you’re spread betting, or a CFD day trader, all of the above will help feed you the information you need to start turning a profit. It is those that don’t seek help and advice, when they lack spread betting experience, who end up with disappointing returns.
Spread betting 101 – follow the news. Markets are constantly changing in reaction to news events. That’s why the best spread betting platforms offer live news feeds. You can even find news resourced dedicated to specific markets. Some of the best sources available are as follows:
- Yahoo Finance
- Google Finance
- Business Insider
A spread betting practice demo account is the ideal way to get to grips with the basics. You can identify mistakes, perfect your strategy and get familiar with the trading environment.
It’s also a fantastic way to trial your broker and platform first. Most of the big brokers now provide this service, free of charge. Your account is funded with simulated money, so you don’t have to risk real capital until you are comfortable. What have you got to lose by using a demo account first?
If you want to join the trading hall of fame with the likes of George Soros, you’ll need an effective way of looking back and analysing your past performances and what you traded.
Keeping a spread betting trading journal is a fantastic place to start. You can keep your journal on an Excel spreadsheet, just include all the essential information:
- Position size
- Entry point & exit
- Profit & loss
- Reason for making the trade
Take a note of this and you’ll find identifying areas for improvement and strategy flaws far easier. Keeping such a dairy is one of the first bits of advice you’ll get in spread betting lessons.
Spread betting millionaires and gurus will have a risk management system they stick to religiously. Entering into the trading arena without such a strategy is the first step towards a series of financial disasters.
Therefore, many suggest never risking more than 2% of your account balance on a single trade. If your balance currently sits at £20,000, you’d never risk more than £400 on a single trade. This will protect you from losing more than you can afford and keep you swinging in the long-term.
Technology has brought with it a world of useful tools, among which is automated trading. Once you have developed an effective strategy and the corresponding algorithm, you can use robots to place your bets following pre-determined criteria. This will allow you to place a much higher volume of trades, across a range of markets.
You can even get automated tax software that keeps a detailed record of all your trades, allowing you to file your tax return at the end of the year with ease.
These algorithms are sophisticated and straightforward to set up. Most importantly though, they will save you considerable time, allowing you to focus your efforts on turning a profit.
It’s important you factor your country’s tax rules into your financial forecasting. In the UK, for example, HMRC deem spread betting tax-free. However, if spread betting is your sole income in 2017, you may find many countries deem it taxable.
If you’re spread betting as non-UK residents, note regulations vary between Australia, India, Malaysia, Ireland, Singapore, Nigeria, Germany, Dubai, Greece, and New Zealand.
So, do your homework and find out if you will be taxed on your profits, and if so, how much. Will it fall under a capital gains tax regime, business income tax, or another?
It’s also worth noting tax avoidance can bring with it severe consequences. Some system’s tax rules impose hefty fines, whilst others could see you face jail time.
For more guidance, see our taxes page.
Spread betting has an ominous name, perhaps undeservedly. However, despite some bad press, there are many out there who have generated life-changing profits with this financial instrument. If you’re looking for inspiration, then read about some of the big wins below.
One whale shorted Facebook when it made its anticlimactic New York Debut in May 2012. The individual believed the stock would fall on the 21st May, and they got it spot on. Shares dipped by $4. An online calculator indicates the person in question made more than $8,000 a point, giving them a total profit of nearly $3 million.
Using IG index, some big hitters cottoned on to a dramatic decrease in price from $1.45 to $1.25 in just 12 months. That 2000 point move saw some individuals selling at $25,000 a point. That’s a total profit of around $50 million.
UK Interest Rates
One switched on individual accumulated £110,000 in earnings, in just 10 seconds, when he bet the Bank of England would slash interest rates by more than 1% in November 2008. The market jumped to 96.31, netting him 51 times his £2120 stake.
So, there are plenty of spread betting kings out there, making an extremely good living. But to answer the question on many people’s lips, spread betting- how much can you make? As the above examples show, some people become millionaires.
As a spread betting day trader, your aim is to bring a degree of predictability to the chaotic and uncertain world we live in. You will place numerous spread bets each day, focussing on tight spreads and markets full of movement. But remember, spread betting for income is not easy money.
There are huge numbers of market losers who can attest to that. However, if you utilise the resources listed above and opt for the right broker and platform, you could soon be taking the first steps to becoming a millionaire spread betting.