Day Trading and Spread Betting, the perfect match or the regulators nightmare? Amongst other things, regulators like the Financial Services Authority are supposed to protect the retail investor (that’s you and me).
However, Day Trading and Spread Betting combine to provide short-term outlooks, leveraged products, buying and selling markets as well as investors trading markets on a hunch or newspaper headline. Not the regulators ideal.
Should you try day trading through spread betting? Of course that depends upon a lot of factors. Let us run you through some of the pitfalls with this type of investment.
Investors who are new to spread betting may want to consider avoiding Day Trading altogether. The short time periods can affect your trading judgement. If you are not entirely clued up on spread betting then trading a leveraged product like spread betting over such a short period of time can quickly land you in trouble. Having a few positions going against you will only increase the pressure.
One way of taking the pressure off is to only trade a handful of positions at any time. Another key way of managing your trading is to trade with small stakes.
A lot of people find trading via Virtual Demo Accounts a very different experience to trading with real money. Not a great surprise. The whole emotional aspect is taken away. Nevertheless you can always try trading with small stakes via accounts with an automatic stop loss through a spread betting company like Financial Spreads. There you can trade £1 per point and quickly rack up £50 - £100 profits / losses on each trade. That should remind you that you are not playing but without hurting you too much.
Greed is good...not when it comes to serious trading. Why do you need to day trade? It does not suit many investors. Are you just being greedy? Perhaps you are too impatient to wait a week to make a profit? If that is the case then any sort of trading, be it through CFDs, stocks and shares, spread betting etc, may not be right for you.
Data, data and more data. Day Trading is also very difficult if you have a fulltime job where you are not sitting in front of the markets all day. If you are reliant on short term trends and you cannot see them then either you will:
(probably) start losing and/or
make sure you are watching the markets and your Day Job will suffer instead. As a rule I find it best not to mess around with your main source of income
Wide spreads are another negative although less so these days. If you are fixed on Day Trading then beware of wide spreads and/or markets will little volatility. With either or both you can easily lose out to the spread itself. Eg the spread on a smaller AIM stock could be 19-22p ie approximately a 15% spread. Very wide. Those shares will have to move a lot before you can make a profit.
If the normal variation of shares on a single day is less than 5% then these shares will probably close around 20 to 21p. If you Sell the market at 19p or Buy it at 22p it is likely to close around 20 to 21p and you are still only likely to make a 1 or 2 point loss. And that is if the shares move in the right direction. If they move against then you could be 3 or 4 points down.
In short, Day Trading and Spread Betting are not a great combination for many people. That is probably why many investors choose to run their spread bets with an emphasis on short-term trading rather than day-trading. Trading spread bets over a few hours if needed but also over 20-30 days if that suits the position best.
'Day Trading and Spread Betting', Tips by D. Jones, last update: 7-Aug-09
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