Case Study: Interview with a new Spread Bettor

Richard Leader interviews a spread bettor who started trading in April 2008. Here is his story.
This article is taken from the Investor's Guide to Spread Betting. Download your free copy here.

“What first attracted me to spread betting was the idea that I could grow my capital faster than through the more usual funds and pensions route. I still invest in funds but see them more as a managed savings account for the longer term. What spread betting offers me is something more active to do with my money."

Starting out

OK, I should have done more research before I started trading. Or rather, I did do the research but I should have been more disciplined in sticking to it. Initially, I wanted to trade the FTSE and did some pretty rigorous analysis of historical patterns – particularly open and close prices.

For the first month or so, I did well – the market was on the up, the feeling in the market was positive and I was following the trend. However, as the profits rolled in, I became blasé and took a less rigorous approach to my research and strategy.

There were three grave errors I was making. They all seem so obvious now but they didn’t seem so clear at the time:

  • I didn’t realise that the market was moving against me on a more consistent basis – a new trend was forming and I wasn’t noticing it. I thought my system worked and my losses were a temporary blip
  • Over-confidence and an attempt to regain losses led me to risking too much per trade. Rather than betting £1 a point on the FTSE, I was getting greedy and entering at £10 or more, sometimes up to £30 a point.
  • Unbelievable as it seems, I was trading without stop losses on the platform. While I had them in my head, I was spending too much time screen watching – and when I wasn’t screen watching, I was losing money.

Starting again

I realised what I was doing and I stopped for a couple of weeks to sit back and think about what I’d done. I’d initially funded my account with a decent-enough amount to trade with, but all-told, I lost a lot more than that amount. I needed to rethink my whole trading strategy and work out how to get that money back and start to make a profit.

One thing is clear to me now: I didn’t really understand my own risk profile. I was trading much too riskily.

After re-evaluating my approach, I started trading again. However, I still didn’t really understand my risk profile and I became too cautious. I decided to always have a stop loss, but I was setting them too close, leading to me getting stopped-out too often just on normal price movements. I was back making good trades but getting no-where because of an overly aggressive stop loss policy.

Third time lucky

I now better understand my own risk profile – and I’m sure this is something that will evolve in time. The chart below shows my earnings over time – you’ll see what made me over-confident (early big wins!) and where it all went wrong.

You’ll also see the middle period where I was too risk-averse – I wasn’t losing money but I wasn’t really making any either.

Now, things are back on the up; I’ve now recouped half of my losses. I have a realistic trading plan. I plan to be positive in the next 3 months (sooner probably but only if the trades are there to be placed). I’ll revaluate my strategy again should I get back in profit. While the money is the motivator, my plan is built around the number of points. I know how many points I need to ‘earn’ to breakeven for example.

Trading strategy for individual shares:

I use Digital Look's Stock Screener to target shares for further research. I look specifically at PE ratios and the balance sheet. I also screen on share price.

I set my stop loss at around 10% of the share value or at an overall loss of £100. That’s what I’m prepared to lose on any give trade. I only trade at £1-£5 a point.

I’m no screen-watcher anymore, so I also set a limit order – looking for profits at around double my stop loss. This means I need to be right more than 50% of the time to profit. At the moment, my win:loss ratio is around 70:30. If this declines, I’ll reappraise my stops and limits.

The future

Once I start to make a profit (assuming I do), I’ll start to build-up my bet price bit-by-bit, though I won’t be making the mistake of diving back in at £30 a point again!

All told, I’m putting in between 5 and 10 hours a week on my spread betting. Here's something else I've learned: When I put in 8 hours research and 2 hours trading, I tend to win. When I put in 2 hours research and 8 hours trading and screen watching, I tend to lose. And that, for me at least, is the key.”

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Please remember that Spread Betting is a leveraged product and carries a high level of risk to your capital. It is possible to incur losses that exceed your initial investment. This product may not be suitable for all investors, therefore ensure you fully understand the risks involved and seek independent advice if necessary. You and CMC Markets, and not Digital Look, will be the counterparties to each Transaction. CMC Markets (i) executes transactions with you solely as principal and (ii) deals on an execution only basis - therefore CMC Markets is not under any obligation to provide any advice on the merits of any transaction. CMC Spreadbet Plc is authorised and regulated by the Financial Services Authority. *Tax laws can change.

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