Adventures in Spread Betting: episode 1

The interesting thing about financial spread betting is just how unlike betting it is. It's amazing how few "City traders" actually work in the City.

Betting on spreads – where you’re given bid/ask prices by your spread betting provider, and you wager a sum per point on how far and in what direction the price will move outside this range – is classed as gambling in the UK. But since you can back your decisions with all the normal tools of the financial business – technical analysis, corporate fundamentals, information – spread betting isn’t really about gambling, any more than poker’s about gambling if you know where all the aces are.

However, it’s not really about investing either. (You’re not buying a share; you’re contracting with a bookie about where its price will go.) Spread betting is really about trading. Buying cheap and selling high, like every form of mercantile exchange for 30,000 years. Like a bank extending you credit, you can trade on the margin: with most bets your provider will only ask you to front 5% of your total exposure. And you can use leverage to magnify your wins (betting £10 a point, a penny’s rise in share price gives you a thousand times that in profit) meaning the profit opportunities are large. Of course, the downside is just as big – which most people find out very, very quickly.

(One resource I use a lot is this site: http://www.financial-spread-betting.com/. It’s got a huge array of articles on pretty much every aspect of spread bet investing, including stuff about other exotica like CFDs.)

I’ve been FSBing a day or three a month for the last six months, and just starting to get into it seriously. It’s something I thought I’d enjoy; I never expected it to get vocational. But when I looked back on trades the Why of it became obvious. I don’t have a gambling mentality; in twenty trips to Las Vegas I’ve sat down at a blackjack table precisely once. But I do have an affinity with charts and patterns – the trends and trajectories of technical analysis. In spread betting, that’s what you’re really betting on – herd behaviour, not the fall of a dice or the turn of a card.

I wrote a thesis on behavioural finance once; the way human biases affect markets is a subject I know a lot about. In addition, the complexities of financial derivatives that keep most people out of the game – the calculations around stops and limits, the patterns of market timing, when to go on margin and how far to pull the leverage – are, at the scale I’m doing it, simple enough to fit on a spreadsheet.

Now I’m starting to trade seriously I’ve decided to blog my wins, losses and learnings – keeping it open keeps me honest. As with all writing, the critical thinking it forces will help me develop a trading strategy – patterns that work, patterns that don’t, places where my own cognitive biases get in the way. In two years or so I hope to be trading for a consistent monthly profit; note what matters here is consistency rather than number of zeroes. Here goes nothing…

One thought on “Adventures in Spread Betting: episode 1

  1. Pingback: 2012: moments to remember « Chris does Content

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