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• • • • Sample • • • •
www.harriman-house.com/financialspreadbettinghandbook
by Malcolm Pryor
The Financial Spread BettingHandbook
The definitive guide to making moneytrading spread bets
• • • • Sample • • • •
HARRIMAN HOUSE LTD
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First edition published in Great Britain in 2007 by Harriman House.This second edition published 2011.
Copyright © Harriman House Ltd
The right of Malcolm Pryor to be identified as the author has been assertedin accordance with the Copyright, Design and Patents Act 1988.
978-0-857190-85-7
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Designated trademarks and brands are the property of their respective owners.
For Karen
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ContentsPreface to the 2011 edition xiPreface xvAcknowledgements xviiiRisk Warning xixIntroduction xxi
PART 1 – Base Camp 1
1. Choosing A Spread Betting Firm 5
Origins and growth of the market 7Selection criteria 8The 6-Stage Plan for opening an account 9
2. Getting Set Up – Computer Hardware And Software 11
Hardware 13Internet connection 15General software 15Backing up 16
3. Trading Resources 17
Trading software 19Price data 21Information 24Websites 25
4. What Do Winning Spread Bettors Bet On? 27
Markets 29The 3 key tests 32Differences between the spread betting firms 37Personal observation 37
5. Choosing A Spread Betting Type 39
Types of betting 41Differences between the spread betting firms 47
6. Timescales For Spread Bets 49
1. Extremely short timescale 512. Short timescale 513. Medium timescale 524. Long timescale 525. Very long timescale 54
The Financial Spread Betting Handbook
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7. Pricing And Hedging 57
Do they really want you to win? 59How spread betting firms work out their prices 61How competitive is the market? 64Do they hedge? 64Future developments – a wish list 65
8. 10 Common And Really Expensive Spread Betting Errors 67
1. No edge 692. No planning 693. Wrong bet size 704. No risk management 715. Mistiming exits 726. Out of control 747. Not in tune with the markets 758. Running before walking 769. Emotionally unstable 7610. Not taking responsibility 77
9. Keeping Losses Small – The Stop Loss 79
Stop or no stop? 81Near or far? 82Automated or mental? 83Instant or delayed? 84Techniques for placing stops 84One more useful approach – the time stop 87Two tips 87Moving stops 88
10. Spread Betting Order Types 91
Time stop 97Are some orders better than others? 98What’s on offer in the market? 100
11. Practical Issues 101
Order placement 103Automated stop orders 107Dispute resolution 109Funds transfers 111Keep abreast of your margining position 111Congratulations! 112
PART 2 – Climbing The Mountain 113
12. Finding A Strategy That Works For You 117
What do you like? 119Technical analysis is excellent for spread betting 120The basic choice: trend or countertrend strategies? 123Or delta neutral strategies 125Master one strategy first 125
13. Spread Betting Strategy I – Betting On A Trend – Trend Identification 127
Basic concept – using spread betting to ride a trend 129Break outs or pullbacks? 132How to identify trends 132
14. Spread Betting Strategy I – Betting On A Trend – Selecting A Bet 147
Simplifying trade selection – the weekly shortlist 150Simplifying trade selection – identifying daily set ups 152Taking the trade – entry triggers 155A new approach to short listing 157
15. Spread Betting Strategy I – Betting On A Trend – Bet Size 159
Taking the trade – the right size of spread bet 161
16. When To Exit A Bet 167
1. The bet goes against us 1692. The bet goes nowhere 1693. The reason for the bet disappears 1704. The bet goes our way 170
17. The Re-entry 177
18. Spread Betting Strategy II – Betting On Reversals 181
1. Buying support and selling resistance 1832. Betting on candle patterns 1853. Betting on gaps 1874. Betting on divergence 187
19. Spread Betting Strategy III – In And Out Within A Day 191
You need the time to do this 193Finding intraday bets 193Betting as company results come out 193Betting on false break outs 195Betting on blow offs 198Betting on indices and currencies intraday 199Binary betting 202
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Contents
20. Advanced Strategies 207
Arbitrage 209Pairs trading 211Hedging 215
PART 3 – The Route To The Summit 217
21. The Right Strategy For You 221
Character 223Account size 224Beliefs 224Attitude to risk 226
22. Staying In Control – Planning 229
Annual trading plan 231A week in the life of a successful spread bettor 233
23. Staying In Control – Record Keeping 237
24. Staying In Control – Regular Reviews 241
Monthly review 243Annual review 244
25. Staying In Control – Risk Management, Again 245
Staying in tune with the markets 247Monitoring positions 248Margin control 249Managing total exposure and leverage 249Net long/short 251Diversification 251Standing aside 251Counterparty risk 252Exceptional events 252Contingency planning 252
26. Developing A Winning Attitude 255
Profile of the successful spread bettor 25810 rules for profitable spread betting 260
27. Continual Development 263
Books 265Seminars 267
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The Financial Spread Betting Handbook
Appendices 269
Examples of Basic Bets 271Spread Betting Glossary 273ADX 275Support and Resistance 276Betting via Exchanges 277
How it works 277
Benefits and risks of this type of betting 277
Index 279
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Contents
Preface to the 2011 Edition
Major changes in the spread betting arena
It is four years since the first edition of this book was published and therehave been some major changes in the spread betting arena.
Here are some of them:
1. The number of firms offering spread betting services has increasedsignificantly to well over 50, partly due to the proliferation of white labelservices where an established firm licenses its technology to another firmwhich then repackages the services under their own brand name.
2. The customer base has become more sophisticated, being much moreready to jump ship to another firm if they see tighter spreads or betterproducts.
3. There has been downward pressure on the size of spreads. A decade agoI had to pay a spread of 12 on the FTSE making day trading impractical,now the spread is 1; on two of the currencies I trade I can get a spread ofzero (and the spread betting firm still makes money).
4. Some unacceptable practices, such as the infamous requoting of prices,have been discontinued.
5. Trading platforms have improved considerably, including the quality ofreal time technical analysis tools.
6. Many firms have invested heavily in education, in particular makingsignificant improvements to the quality of their websites.
Despite all of this the vast majority of spread bettors are still not winning ona regular basis and the original purpose of this book which was to identifywhat winners do that losers don’t, and vice versa, remains as valid as it wasfour years ago.
For instance, in the first edition of the book I remarked that most sharetraders remained long throughout the 2002 bear market, to their cost.
Since then we have seen the credit crunch, and another bear market, and onceagain that bias for going long (rather than adapting to the market conditionsand looking to go short) has cost spread bettors dearly.
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Key changes in the 2011 Edition
There are quite a few changes in this second edition, partly due to the changesin the spread betting world discussed above, and partly due to newdevelopments in my own trading. Here is a brief list of some of the keychanges.
Changes in Part One• Sections on computer hardware updated to reflect recent developments in
technology
• Sections on price data updated to reflect improvements in the quality ofdata supplied by the spread betting firms
• www.spreadbettingcentral.co.uk introduced, you are stronglyrecommended to join the forum at this site
• Updated information on spreads, and updated tables reflecting thechanged spread betting and market environment
• Updated information on cost of carry
• Revised analysis of spread betting firms’ approach to pricing and hedging
• Updated wish list for future improvements in spread betting firmproducts
• An additional trailing stop technique
• Updated analysis of available order types
• Substantially revised section on practical issues reflecting the changes inspread betting firm practices
Changes in Part Two• More explicit introduction to Part Two, emphasizing that the strategies
are there to demonstrate the wide range of strategies available to spreadbettors, and that they are illustrative, not designed to be followedverbatim
• Illustration of an additional technique for defining a trend (many readersof the first edition zoomed in on ADX, perhaps looking for a “silver
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The Financial Spread Betting Handbook
bullet” to solve all their trading problems; in my own trading I use ADXa lot less than I used to)
• Section on divergence plays rewritten
• Expanded and amended section on intraday strategies, reflecting changesin my own preferences
Changes in Part Three• Updated sections on record keeping and on regular reviews
• Completely rewritten section on managing total exposure and leverage(the concept of portfolio heat is introduced)
• Updated list of my top 25 books, including some published after the firstedition of my book was published
Changes in the AppendicesThe list of spread betting firms is no longer included (go towww.spreadbettingcentral.co.uk for latest list).
The song remains the same
Spread betting continues to attract new entrants both in terms of new firmssupplying spread betting services and new customers. Spread betting productshave been improved further over the last few years. Provided that using theseproducts is consistent with their objectives and risk preferences traders andinvestors have the opportunity to take advantage of price movements ondifferent timeframes and across a range of instruments. The benefits are asclear now as they were four years ago, However, so are the risks if thosetraders and investors fail to prepare themselves adequately to “climb themountain”. That is still what this book is about.
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Preface to the 2011 Edition
Preface
About the authorMalcolm Pryor is a member of the Society of Technical Analysts in the UKand has been designated a Certified Financial Technician by the InternationalFederation of Technical Analysts.
He is a director of a consultancy practice, and is an expert at several games,including bridge where he has held the rank of Grandmaster or higher since1996.
What this book coversThis is a book about financial spread betting. Although spread betting startedway back in the 1970s, recent years have seen an explosion of interest, withincreased demand for the product and new betting firms entering themarketplace. It is easy to open an account, and many people now have doneso. Unfortunately, it is not so easy to make money.
What do successful spread bettors do that is different?
This book has been written to try to answer that question.
Who this book is forThis book is not for:
• complete beginners, it assumes a basic understanding of how spreadbetting works;
• people who think there is easy money out there, just waiting to be pickedup;
• those who want to spread bet for the adrenalin rush, irrespective of theresults.
Rather, the book has been written for people who want to have a serious goat spread betting, managing costs and risks, and who recognise that it willtake some skill and effort.
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If you are one of those people, this book will be of interest to you whetheryou have a spread betting account now, had one in the past, or are thinkingof getting one in the future.
These days, the vast majority of spread bets are placed online. I am assumingthat readers will already have a computer or laptop with internetconnectivity.
How this book is structuredImagine a mountain called Spread Betting. Our mission is to climb it.
There are three key stages to climbing a mountain:
1. first a Base Camp must be established;
2. from there the journey up the mountain face begins; and
3. finally one makes an attempt on the summit.
This book reflects this three stage approach and is divided into three mainparts. Let’s expand on this a little.
We start with an Introduction which reviews some of the benefits of spreadbetting and highlights its current impressive growth.
Part 1
In the first Part of the book, we set off to reach Base Camp. We review howto select a spread betting firm. We look at the hardware and softwarerequirements to run a spread betting account and other resource requirementssuch as price data, information and websites. We look at the timescales formaking spread bets. We survey what winning spread bettors bet on and thetypes of instrument available. We review how the spread betting firms maketheir money, covering some controversial issues, including how prices are set,how competitive the market is, and whether the firms hedge our bets. Weexamine 10 common and really expensive errors spread bettors make. Wehighlight the importance of stop losses. We examine in detail the variousdifferent ways in which we can enter and exit bets and when to use each typeof order. Finally we deal with some of the practical issues to do with runninga spread bettng account.
We are now ready to climb the face of the mountain called Spread Betting.
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Part 2
In Part 2, we start to climb the mountain. We outline various strategies thatwe could select for spread betting. We take a detailed look at the first strategy,betting on a trend, covering the basic concept, timeframes, identification oftrends, weekly shortlists, daily set ups, entry triggers, position sizing, profittaking and re-entry. The next two strategies are then covered, betting onreversals, and in and out within a day; and we follow up by outlining anumber of delta neutral strategies including pairs trading, arbitrage andhedging.
We are now ready to make our assault on the summit.
Part 3
In Part 3, we set off on the route to the summit. We highlight the importanceof the individual spread bettor in the equation, and we look at how the mostsuccessful spread bettors stay in control through planning, record keeping,regular reviews and various techniques of risk management. Part 3 concludeswith a chapter on developing a winning attitude and a chapter on continualdevelopment.
Supporting websites
www.spreadbettingcentral.co.ukA site dedicated to spread betting, containing a wealth of information onspread betting, links to resources, blogs by Malcolm Pryor, and a forum(readers of this book are strongly recommended to register for this – go to thesite, click on forum, click on register).
www.sparkdales.co.ukThis is the site to register for seminars on spread betting run by MalcolmPryor.
www.harriman-house.comThe website of Malcolm Pryor’s publisher.
Preface
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AcknowledgementsI have many people to thank for providing support, advice andencouragement to me while writing this book and I shall not be able to namethem all personally; I really appreciate it, thanks.
I would like to thank the directors and staff of Harriman House for their helpin publishing this book, especially Stephen Eckett who saw its potential andmade it a much better book than it otherwise would have been.
I would like to thank the authors of the 25 books which have made thebiggest impact on my own spread betting, whom I acknowledge in the finalchapter.
I would like to thank Martin Stamp and Ionic Information Ltd for producingthe ShareScope software and allowing it to be used to produce the charts inthis book.
I would like to thank Dr. Van K Tharp, mentor and friend.
And most of all I would like to thank Karen, to whom this book is dedicated.
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Risk WarningNo responsibility for loss occasioned to any person or corporate body actingor refraining to act as a result of reading material in this book can be acceptedby the Publisher or by the Author.
The information provided by the Author is not offered as, nor should it beinferred to be, advice or recommendation to readers, since the financialcircumstances of readers will vary greatly and investment or tradingbehaviour which may be appropriate for one reader is unlikely to beappropriate for others.
Introduction
What’s special about spread betting?It probably won’t come as a surprise that I am a fan of spread betting. Itsattractions include:
Spread betting is very straightforward
The mechanics of entering or exiting bets are straightforward. Since this isnot a beginner’s book on spread betting, for the most part I will assumeeveryone is familiar with the basics of how spread betting works. The spreadbetting firms' websites and marketing literature provide easy to followexplanations of the mechanics. (In case you feel you need a refresher, somebasic bets are illustrated and basic terms explained in the Appendix.)
Open to everyone
You can open a spread betting account with just a few hundred pounds.
Credit available
Spread betting firms do sometimes offer credit facilities. For many peoplethese will be unsuitable. Spread betting is a leveraged product (see below)enabling spread bettors to take positions many times the size of their account.In my view people who have to borrow to fund the account in the first placerun the risk both of over trading and of getting themselves into unacceptablelevels of debt.
Exposure to a wide range of markets
You can bet on commodities, interest rates, bonds, stocks, indices andcurrencies – all of which can be traded from the one account. And if that’snot enough there is also betting on sports and politics – it seems like you canbet on almost anything today.
Ability to go short
You can bet on stocks falling in price. Before spread betting came along,shorting stocks wasn’t easy for ordinary investors. With spread betting,
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shorting is as easy as going long. Shorting is not a natural activity for manynew traders, but trading without shorting is like trading with one hand tiedbehind your back.
No Tax
You make money and you don’t pay tax on it – that can’t be bad! However,there is a double edged sword here in that if you have trading losses you can’toffset your losses against any capital gains you might have elsewhere. Also,the tax advantages are not much use if you don’t make any profits, or if yourprofits are less than the capital gains threshold.
Low transaction costs
No stamp duty and no commissions! These costs can really mount up if youactively trade the underlying instruments direct. However, you will generallyfind the spreads in spread betting are higher, offsetting some of theadvantages regarding stamp duty and commissions.
Remove currency exposure
With most firms you can bet on, say, a US stock in pounds per point ratherthan dollars per point. So you don’t have to worry about the dollar going upor down in addition to worrying about the price movement of the instrument.
Sophisticated trading platforms
Most spread betting firms have invested heavily in their trading platforms,which offer sophisticated risk and account management tools, charting,analysis and news as part of the service.
Leverage
Spread betting can offer extreme leverage. For instance, you can bet on oneof the larger FTSE 100 stocks with only 3% margin.
Let's take BHP Billiton as an example, with the stock trading at 2600p. Youcan have exposure to the equivalent of £2600 worth of BHP Billiton stockwith just £78 of money in your account. Or £26,000 worth of stock with£780. Or £260,000 worth with £7800. But with such leverage comes highrisk, which is one of the topics we look at later.
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Overlap and convergence of betting productsRecent developments in sports betting are now starting to spill over into thefinancial spread betting world. In sports betting there are three ways to bet:
1. fixed odds betting (e.g. the traditional bet at the bookie’s),
2. betting exchanges (where in general the odds are more favourable thanusing a bookie, and where you can get to play the bookie by laying as wellas backing results), and
3. sports spread betting.
In the financial arena, betting exchanges haven't as yet taken off, but I predictthey will do one day; fixed odds betting is firmly established, in two forms:binary betting; and the innovative range of products offered by firms such asbetonmarkets.com.
We do look briefly at betting exchanges, and the two forms of fixed oddsbetting, but the primary focus of this book is standard financial spreadbetting.
One million spread bettors
Spread betting is growing rapidly. One recent estimate put the number ofcustomers at between a quarter and half a million, with expected growth toin excess of one million over the next 5 years.
Climbing the spread betting mountain
You can peer at the Summit of the Spread Betting Mountain in the distanceand dream of riches, but if you spread bet without knowing what you aredoing you will be like a climber setting off to climb a mountain with nopreparation, no protective clothing, no equipment and no guide. This bookwon’t guarantee you success but I do hope that it will plug some of thosegaps.
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Introduction
Base CampPART 1
Part 1 – Base Camp
If we want to climb the mountain called Spread Betting, our first task is toreach Base Camp. Getting to Base Camp means we will have the requisitebackground knowledge and resources to start spread betting. Morespecifically, we will know how to select a spread betting firm; we will haveidentified the resources we need by way of hardware, software, price data,information and websites. We will have formed a view on what underlyinginstruments we wish to bet on, and have an understanding of the variousspread betting products on the market. We will have respect for the dangersof spread betting and understand where many spread bettors go wrong. Wewill have enhanced our safety by appreciating the merits of stop losses; andwe will have a good understanding of the various methods of entering andexiting bets. When we get to Base Camp we will already be better equippedthan many spread bettors.
3
Choosing A Spread Betting Firm
1
Before we start to spread bet we need a spread betting account. This chapterprovides a little background to the spread betting market and then looks athow to select a spread betting firm. If you are an experienced spread bettorwith more than one account you may find you know most of this materialand can whizz through it.
Origins and growth of the market
IG Index – the first spread betting firm
The first spread betting firm was IG Index, who set up a facility in 1974 forpeople to bet on the price of gold (when there were restrictions on buyinggold outright). They also introduced betting on a number of other financialinstruments.
Over time, other firms entered the market and the range of the futures styleproducts on offer expanded. Sports betting was also introduced. The spreadbetting market expanded rapidly from the end of the 1990s as both demand(new customers) and supply (new spread betting firms) increased.
Deal4free introduce rolling daily bets
The market changed quite significantly when deal4free (today trading ascmcmarkets) entered it, Firstly, because they had an open and aggressivestrategy of undercutting the other firms’ spreads and secondly because theymarketed a new product (which has since become standard across theindustry), the rolling daily bet.
In the past few years there have been many further new entrants to themarket, so that at the last count there were over 50 firms actively offeringspread betting services, many of them “white label” (i.e. licensing andadapting another firm’s spread betting platform and infrastructure ratherthan building their own from scratch).
This increase in supply, combined with increasing customer sophistication,has resulted in a much more competitive market.
Spreads have tightened, and continue to tighten, as customers are increasinglywilling and able to switch accounts. For example, when I started out thespread on the FTSE was a whopping 12 points, effectively making day
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trading unrealistic. Now many firms are offering a spread of just 1, andtherefore many spread bettors are able to day trade the index.
Trading platforms have improved significantly and service quality, seen ascritical, has improved.
On a personal note, I have preferred over the years to have accounts withmore than one firm. In fact, with many of them. It is helpful to:
• see who is currently offering the tightest spreads,
• keep up with new product offerings, and
• make sure I can always place the bets I want in the volume I want.
I have occasionally found that one firm won’t take any new bets on aparticular instrument, for whatever reason, while another firm is still open forbusiness in that instrument.
Selection criteriaChoosing a spread betting provider will depend to some extent on yourpersonal preferences. In particular, these preferences will impact on theweightings you put on the main criteria:
1. range of products,
2. are the specific products you want available?
3. tightness of spreads,
4. general functionality, such as quality of order automation (e.g. stops),
5. trading software/website – quality of extras (e.g. news, fundamentals,technicals),
6. financial stability of the spread betting firm,
7. quality of trade execution, back office and customer service, and
8. additional benefits (e.g. interest paid on funds in the account).
For my own betting, three of these criteria stand out as being significantlymore important than the others.
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The Financial Spread Betting Handbook
1. Specific product (rolling daily bet)
I want a specific product to be available (the rolling daily bet product),since that is my favourite type of instrument. This is my preference.Maybe in your case it is the binary bet product that is most important, orthe less common commodity futures products, or something else.
2. Size of spread
The tightness of spreads is critical to me, since that has a big impact onmy style of trading over the course of a year. The trading software is ofcourse also important, however I could personally live with an inferiorplatform that had tight spreads in preference to an all singing all dancingplatform with inferior spreads.
3. Financial stability
I want to minimise the risk of losing money because the spread bettingfirm gets into financial difficulties; this means doing some research on thefirm itself, for instance by looking at published accounts.
The back office and customerservice support has in myexperience been helpful andreliable from all the firms I havedealt with.
Once in a while one of the firmsembarks on a marketingcampaign giving away freebies.
The 6-Stage Plan for opening an accountThere are six key stages to work through when opening a spread bettingaccount:
1. Inspect the marketing literature and advertisements; the larger firmsadvertise regularly in the weekly investment magazines.
2. Look at the websites to see which ones you like best and check productranges.
3. Check out the size of the spreads.
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1 – Choosing A Spread Betting Firm
At various times customers havereceived PDAs, free bets, andchampagne. By all means enjoy themif you get them, but base yourselection on all the criteria, not justthe giveaways.
4. Get feedback from current users, for instance atwww.spreadbettingcentral.co.uk, or at other financial trading forums.
5. Research the financial position of the spread betting firm, for instance viapublished accounts.
6. Open more than one account, for flexibility.
There are a few additional points that may be important for some traders andnot others, such as:
• minimum account size – varies from £100 to £5000;
• availability of credit facilities;
• margin structure – varies by firm and product, for instance the marginrequirement for stocks can vary from 3% to 25% depending on thepolicies of the spread betting firm and the size of the company whosestock you want to bet on;
• quality of training material; and
• ability to practice on a dummy account or with very small bet sizes in areal account – increasingly the more innovative firms are allowingcustomers to start betting for less than £1 a point on some instruments.
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The Financial Spread Betting Handbook
The Financial SpreadBetting Handbook
The definitive guide to making moneytrading spread bets
Malcolm Pryor
www.harriman-house.com/financialspreadbettinghandbook
Paperback: 9780857190857eBook: 9780857191601
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