Best spread betting strategies and tips
Spread betting enables you to execute a range of trading strategies, thanks to the range of benefits it offers traders. Discover some of the most popular spread betting strategies and some tips for getting started.
Top four spread betting strategies
A trading strategy is nothing more than a predefined methodology for how a trader will enter and exit the market. It will identify specific market circumstances and price points during which a trader will look to execute and close their trade.
We’ve taken a look at some top-level strategies, and the way they would be carried out using spread bets.
- Trending market spread betting strategies
- Consolidating market spread betting strategies
- Breakout spread betting strategies
- Reversal spread betting strategies
This is by no means a full list of all of the trading strategies that can utilise spread bets. In fact, as long as the platform you are using has the appropriate technical analysis tools, most strategies are suited to using this popular derivative product.
Trending market spread betting strategies
A trending market is one that is reaching higher highs or lower lows. Trading with a trend is usually the practice of those who adapt the ‘position trading’ style, and is considered a medium-term strategy.
A trend trader’s strategy would use charts and technical analysis to identify the beginning and end of market movements. This often includes the use of indicators such as moving averages and the moving average convergence/divergence (MACD) to identify where to open and close their spread betting positions.
Trend trading is a popular strategy among spread betters, as they can follow the market momentum regardless of whether they are going long or short.
For example, if the price of soybeans was thought to be in an uptrend, with higher peaks and troughs, a trader might open a long spread betting position. They’d do this by opening a spread bet to buy soybeans. Once the trader has reached their profit target or acceptable loss, or analysis has shown the trend will soon be reversing, they would close their position by selling soybeans.
On the other hand, if the soybean market was in a downtrend, meeting lower highs and lower lows, a trader might decide to open a short spread betting position. They would do so by opening a position to sell soybeans.
Consolidating market spread betting strategies
Consolidating markets are range bound – so instead of reaching price extremes like trending markets, they remain within lines of support and resistance. This is why consolidating market strategies require traders to use indicators to identify entry and exit points within the range bound market, such as the relative strength index (RSI).
An important part of a consolidating market strategy is volume analysis. When a market is trading within a range, the volume of trades is usually low and flat, but if the range is about to break there will usually be a rise in volume. This can be a clear indication that it is time for traders to think about closing their positions and, potentially, switching to a different strategy.
Although consolidating markets don’t provide the opportunity for running profits, they can create plenty of opportunities for short-term traders, such as scalpers.
Scalping is a trading style that is designed to profit from small and frequent price changes. Although traders might not make the large, long-term gains you’d see with other styles, they enter and exit far more trades, with the aim of taking smaller profits more often.
Many believe taking such short-term positions might not produce the same results as longer-term strategies but spread betting can help capital to go much further. This is because spread betting is a leveraged product, which means that traders can open positions that are much larger than their initial deposit. It is important to remember that while leverage can magnify your profits, it can also magnify your losses. This makes it crucial to have a suitable risk management strategy in place.
Breakout spread betting strategies
Breakout trading involves entering a trend as early as possible, ready for the market price to ‘break out’ from a consolidating or trending range. Breakout strategies are based on the idea that key price points are the start of a major movement, or expansions in volatility – so by entering the market at the correct level, a trader can ride the trend from start to finish.
Typically, traders looking to take advantage of a breakout will need to identify support or resistance levels – as once these have been met or surpassed, they will need to enter the market. Most breakout trading strategies will utilise volume trading indicators, and RSI or MACD technical indicators to find these levels.
One strategy used to spread bet breakouts is to place limit-entry orders at key price points, so that if the market moves through the support or resistance level, the order is executed automatically.
For example, let’s say you wanted to open a spread betting position on gold, which is currently trading at $1255. Although the market has been trading in a range for two weeks, you believe it is due to breakout into a downward trend. Looking at historic levels of support, you can see that $1250 is a key price point. So, you decide to place an entry order to open a short spread betting position if the price of gold falls below $1249. If the market did fall below this price, your spread bet would be executed, and you could ride the breakout until your analysis indicated the downtrend was over. If the market didn’t fall to this price, your trade would never be executed.
Reversal spread betting strategies
Reversal trading strategies are based on identifying areas in which trends are going to change direction. Reversals can be both bullish or bearish, giving a signal that the market is either at the top of an uptrend, or at the bottom of a downtrend. Traders using this strategy would open a spread betting position in the opposite direction to the current market trend, ready to take advantage of the reversal. This can also be known as ‘contrarian trading’.
When trading reversals, it is important to ensure that the market is not simply experiencing a retracement – a more temporary move. Retracement levels are commonly identified using the Fibonacci retracement tool. If the price goes beyond the levels identified by the tool, it is taken as a sign the market is reversing.
Although reversals can be a complicated spread betting strategy, with the use of indicators, there can be a wealth of opportunities. In order to execute a reversal strategy, a trader will need to utilise a confirmation tool. These can include:
- Technical indicators, such as moving averages, MACD, and the stochastic oscillator
- Volume, as high volumes add greater confidence that the market movement is likely to continue
- Key reversal candlestick patterns, such as the head-and-shoulders pattern, or a double top and bottom
For example, let’s say you wanted to create a FTSE 100 spread betting strategy and decided to focus on reversal trading. Although FTSE 100 has been in a downtrend for the last week, you believe that following positive earnings announcements for major FTSE constituents, the trend will reverse. You decide to enter a position if you identify the double bottom candlestick pattern, in the hopes of taking advantage of the upcoming price increase. If the market did reverse, you would be in a position to profit from the upswing. However, if the market continued to decline, you would suffer a loss.
Develop your knowledge of spread bets
Before you start to spread bet, it is crucial to have an understanding of what spread betting is and how it works.
When you spread bet, you can speculate on the future price movements of a range of global markets, such as forex, commodities, indices and shares. And because you don’t own the asset, you won’t have to pay tax on any profits you make.1 These are just some of the benefits of spread betting, others include hedging, out-of-hours trading and no commission.
Build a trading plan
Prior to even thinking about which strategy you are going to implement, you should create a trading plan that will give your time on the markets clear direction and purpose. Your plan should always be unique to you, but most plans include:
- Goals. These shouldn’t be crazy, unachievable claims about the amount of money you want to make, but rather attainable and measurable statements of what you hope to achieve
- Style. Trading can be carried out in a variety of ways, depending on how often you want to trade and how long you want to keep those trades running. Some popular trading styles include day trading, position trading, scalping and swing trading
- Attitude to risk. Your plan should include your risk profile, including how much capital you have available to trade with and how much you would be willing to risk on each trade
Choose a market to trade
When you’re building your trading plan and spread betting strategy, you might already have a market in mind. But if you don’t, it’s important to choose which assets you want to focus on before you start spread betting.
Most people will choose to trade a market that they already have an interest in, so they have prior knowledge that they can fall back on. With IG, you can trade over 16,000 markets, including indices, forex, shares, commodities and many more.
Manage your risk
Before you open any spread betting position, it is important to be aware of exactly how much you could stand to lose if the market turned against you. Especially as spread bets are leveraged, you could stand to lose – or win – much more than your initial deposit. It is always wise to think about your trade in terms of its full value, rather than the amount you pay to open it.
One way of mitigating risk and locking in profits is by setting an automatic stop or limit, which will define the level you’d like to close your trade at. Stop-losses will close a trade if the market moves against you, while limit-close orders will close your position once it has reached a certain amount of profit.
1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
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