Trading Strategies

Opening Strategic Opportunities: Shorting and Pairs Trading

As noted earlier, one of the key features of spread trading is that it is just as easy to go short as to go long. While the stock markets have been in primary uptrends for the last decade, from time they do have corrections and shorting enables traders to take advantage of all market movements.

The shorting feature also makes it a lot easier for traders to pairs trade. A pairs trade involves taking a long position and a short position in a similar instrument in order to attempt to capitalize on relative price movements. Pairs trading can take a number of forms such as between groups, precious metals versus base metals for example; within groups such as oil versus natural gas or gold versus silver; and between a company and its underlying commodity such as a gold producer versus the gold price.

Spread bets aren’t just a cost effective way to speculate on short-term movements in asset prices. They can also be used for lower-risk trading strategies.

Pairs Trade

Another method that is commonly used and which is comparatively easy to understand is pair trading with spreadbets. This strategy is relatively used in the complete leveraged world which is common and is called spread trading where a particular product is bought and another product is sold at the time. Here the pairs trader simply trades the price differential of the two sold products. One clear example of spread trading is buying of Gold and selling of short silver, purchasing corn and selling wheat

A pairs trade involves taking a view on the relative performance of an one asset against another. You simply place a buy bet on the asset you think will perform better, and a sell bet on the asset you think will underperform it. Whether the assets in question go up or down doesn’t matter. You are simply betting that the profit on one bet will outweigh any loss on the other, making you money.

Hedging your Shares Portfolio

A Spread bet can protect you against a short term fall in the value of a share portfolio. You simply place a sell bet on a related index. For example if your portfolio of UK shares is worth 11,000, divide this by the 5600 price of a FTSE 100 index spread bet to calculate your stake: roughly 2 per point. If the FTSE 100 falls to 5500, you make 1200, which should compensate for any loss on the shares.

Hence there are many strategies that are used by spread traders such as pairs trading, portfolio hedging and arbitration plays. Instead of getting confused what strategies should be used, go for the ones that have been discussed above.

The 5 Best Financial Spread Betting Tips & Strategies

Analysing the market trends is perhaps the most basic and popular of all the strategies you would use in spread betting. Analysis of market refers to making use of the available market information and predicting the trend – upward or downward – of the prices of that particular instrument. Market analysis is of two types – fundamental or technical.

Tip 1. Careful analysis of market trends


Fundamental analysis – Fundamental analysis involves in considering and using any kind of relevant information – economic, political, or environmental – that can affect the market directly or indirectly. The information collected is analysed, using a long-term approach, to predict the rise or fall of the markets and take an action based on it. For example, if there is news of global events that can lead to decline in oil supply in the future, bettors would predict an increase in oil prices in the future and act accordingly.

As markets tend to get volatile when reacting to some announcement or news, it is more prudent to wait and observe the price trends during the first 15 minutes or half hour before taking a trade. Fundamental analysis can get tedious as there are so many factors that can affect the market prices and keeping a tab on all would mean constantly checking and substantiating any news that might impact the market you are trading.

Technical analysis – Technical analysis is using past market data, sometimes along with indicator charts, to identify past price trends and predict the trends in future. Unlike fundamental analysis, which considers all kinds of information, technical analysis only focuses on the market related data like trading volumes and price trends. The advantage with technical analysis is that it can be done quickly and can be used for all spread betting timeframes, be it for years or intra-day.

Technical analysis also informs you about the stop loss and limit order points. As technical analysis of spread betting in the market is based on statistics and is done with the help of specialised software, it can be used to generate market trends from the past, which makes it a huge hit with day traders.

Understand that technical analysis can be an efficient strategy only when you know how to use the available information and read the charts accurately. Also, technical analysis considers only the historical trends, and not the present scenario to determine the future market movements.

Combining Analysis – Some spread bettors combine both fundamental and technical analysis to predict the market trends. By considering the historical data as well as the current events that can affect the market, investors believe they can make better decisions. Combining both forms of market analysis helps the bettor to overcome the limitations of the individual methods, and enables him/her to take a better position.

Tip 2. Scalping

Scalping is a popular spread betting strategy that is widely used by experienced, traders. A strategy used for minimising risk, scalping involves quickly opening and closing positions, usually to make a small profit.

Traders who use this strategy have to keep an eye on the market and try to gain whenever they get an opportunity of making even a few PIPs. The idea here is to grab the small gains, whenever possible, during the day and come up with a significant profit by the end of the day.

The main benefit of scalping is that you get to keep your capital intact, or at least preserve a major part of it. Gaining by a few PIPs whenever you can, you can move towards making a big profit with a number of small gains throughout the day. This spread betting tip can be great for traders who are disciplined and risk adverse.

However, scalping can be a painful strategy to implement if you are impatient. To carry out this strategy efficiently, you need to watch the market throughout the day, for favourable positions where you can gain. Another disadvantage here is that you may end up gaining just a few PIPs, when you could have gained hundreds of them by closing the trade a little later.

Tip 3. Break-outs

The trading breakout strategy is one where you wait for a particular equity to break from the price range, which it has been limited to in the recent past. Spread bettors using this strategy usually consider stocks which have not moved beyond a certain price range for a considerable time, but may break out from the boundaries soon. So when strong price movements are hinted for a particular stock, spread bettors try to make huge capital gains by trading breakouts.

Spread bettors who use this strategy use technical indicators to learn if a stock is probably going to breakout. The possibility of a break-out can also be identified when the trade reaches a price anywhere close to its earlier limits. This is done by keeping a close watch on the price movements. This strategy is also used to check if the stock is going to breakout its past lower limit.

In any case, trading breakout allows traders to take a position where they make a profit ultimately. But then, you should understand that the possibility of breakout failure cannot be ruled out completely. To lock their profits in case the price breakout fails, spread bettors set the stop loss for that particular stock, at its previous upper level. Once the price goes beyond the upper limit and stabilises, you can set up a stop loss at the level where it was broken, to keep your profits intact.

Some analysts think the risks are reduced when you wait and see if the price closes on the same side on two successive days. But some think that once you are sure about the old price pattern being broke, you can place the trade and wait to make a profit. The good thing about this spread betting strategy is that the support and resistance levels are well defined, giving you a clear stop-loss position that can be used to trade only in profits.

Tip 4. Reversals

There is always a possibility of a reversal in the market trends, and the reversal strategy uses this premise to help the spread bettor trade for gains. Market trends reversal is based on under or over pricing. The point at which it is most likely to reverse can be determined with the help of the past graphical information or technical charts and moving averages. If you can accurately read the charts and calculate the averages to get a fair idea about when the markets can reverse, you stand a chance to profit.

To begin with, you need to consider the recent lower and upper limits of the index to get an idea about the market’s performance. See if the market is moving into either of these boundaries and keep a tab on the movement of the index. As soon as you find that the markets have started reversing, you can act immediately to take advantage of it.

How successful you are with this spread betting strategy depends on your ability to understand the market reaction and make a move according to it. Sometimes, it could just be a retracement, which is temporary, and not a reversal of the long-term market trends. And being able to identify between a reversal and retracement is essential if you want to take the right decision.

Trading reversal is considered as a low risk strategy because traders make a move only after a reversal is strongly indicated. This helps them cut back the possible loss, while allowing them to make a gain. However, trading reversals in spread betting is also very risky, cannot spot the line between a retracement and a reversal.

Tip 5. Arbitrage

Arbitrage is trading method that a few spread bettors consider for gains. Arbitrage can guarantee profits, but to really gain, you need to have multiple accounts in different spread betting companies. This strategy is implemented with the idea that not all spread betting firms have the same financial spread, and you can use the difference in the spreads to make a profit. For this, you need to keep a track of all your accounts and be quick in buying and selling two trades against each other.

For example, say that company A has a spread of 100p-110p for a stock, and company B has 105p-115p for the same stock. If you have accounts with both the spread betting companies, you can buy the stock at a lower spread of 100p and sell it at 105p and lock in your profit.

But these days, spread betting companies work hand-in-hand in this regard and use specific softwares that help them set the same spreads. Also, the companies use software programs to get alerts about such differences and almost immediately adjust the spreads. Because of this, arbitrage can be considered as a highly risky strategy.

Spread Betting Pointers

No matter which strategy you use in spread betting, your aim is to minimise your risks. Besides using the above tips, here are a couple of points you should always remember to limit your spread betting risks.

Pointer 1. Stop-loss & Limit Orders

Always use a stop loss to stabilise your earnings by limiting your risks. Although this may stop you from gaining more at times, it will almost always save you from placing bad bets. However, relying only on stop loss is a bad idea. If you feel that a particular bet is really bad, it is best to close it in time, rather than wait for stop-loss.

Limit orders will allow you to close the bet once it reaches a certain point and can help you to trade carefully. The takeaway here is to know when to stop to minimise your loss, rather than waiting till you lose everything.

Pointer 2. Managing Emotions

Emotional investing has never helped any trader. Always, it is best to avoid trading if you are not able to focus on it. At times when you are in a disturbed mood, due to any reason, your judgment will be poor and you may end up taking the worst trading decisions, which will further affect you emotionally.

Usually, amateur spread bettors, who are on a losing streak, tend to get desperate to break even, by placing highly risky trades. While it is natural to get affected with a streak of losses, there is a way to avoid getting emotional about it.

  • First of all, remember that spread betting comes with risks. Losing or gaining cannot be guaranteed, and you should be prepared to handle both objectively.
  • Be sure to have a clear idea about the markets you are dealing with and the factors that affect its performance. Spend some time to read the technical charts and market reports to understand the historical performance of the market. In short, be prepared for the markets you are venturing into.
  • Considering that and the risk-reward ratios, make a trading plan and follow it to the letter.

Financial spread betting is not your game if you don’t have the patience for it. Only when you can spare the time and energy to understand and apply the strategies, while accepting the risks that come along, will you be able to minimise your losses and improve gains.

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