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A Life In The Day Of A Spread Bet Trader
I guess I had better put in an early health warning to say that spread betting is not for everyone and as I will illustrate below it is easy in one day to get hit by a loss which can wipe out year to date profits. I would also add that whilst I do have a good background in the financial world, I am no expert in any sense of the word and to paraphrase the late great Bill Shankly I have had no education in spread betting so I have had to use my brains.
For a number of years I used spread betting for two main purposes. For tax planning purposes I sometimes wanted to sell a share to realise a profit or loss before the end of the tax year but I did not want to give up my interest in the growth prospects of the company. I would therefore sell the share, realising the profit/loss and then buy it back through a spread bet. After 30 days I can close the spread bet and repurchase the share. i.e. I used spread betting as a substitute for holding the share. Of course I could have taken an interest in the share through a spread bet in the first place but that is another story.
The second reason for using spread betting was to hedge an option position I held in a quoted company. In the build up to the exercise date of the options I would sometimes take the view that the share price had reached a price I would be happy to sell the shares at but I could not sell as the option had not yet been exercised. I would therefore go short by taking out a spread bet and on exercise of the option I would close the spread bet and sell the shares. This gave me a locked in price.
Last year I decided to become adventurous and do some day trading using spread bets. I use the term day trading but the actual period the bet was open could range from a few minutes to a couple of weeks.
I had no real plan though in theory, in my mind, I was making spread bets on shares I would otherwise have bought (or sold if I had owned them). I would stress that the intention was not to gear up but to avoid tax on the eventual gains.
Time for the second health warning. I know some people are adverse to hearing real figures talked about, so they should read no further. The purpose here is not to go on an ego trick of my willy being bigger than yours but hopefully to give a helpful account of lessons learned. I also appreciate that different figures mean different things to different people. I do not want to get into personal details of my wealth or lack of it so will just say that at all times I was comfortable with the level of risk taken and none of the events which follow were life changing.
I started in March 2006 and my records are not that detailed, however I see that I closed my first transaction on 3 March and that day made a profit of 3,685. By day 43, the high point I was up 72,615. This included a profit of 29,120 realised on day 24. I had gone to Italy for a week, leaving a number of positions open and could not get internet access until the last day of the holiday and found that two of the shares soared. They could have course have gone in the opposite direction.
On day 44 I lost 90,217 on one share.
The share price had been falling and I was averaging down, it kept falling and it reached the price my broker automatically set as the stop loss. I sat in front of the screen watching it reach the stop loss and thought sod it, that's the end of that but it wasn't. I could have closed the position but I assumed that the broker would automatically do this at the stop loss they had set, they didn't. The share went into free fall and was finally closed out at more than 10% below the stop loss level, costing me, from memory, an extra 25,000
I sort of lost interest in spread betting after that and like so many before me my adventure into this world had cost me money.
Then this year I researched a company which I thought was undervalued (Bespak plc)
I was going to buy the shares and then I thought why not do it through a spread bet, and I did and the price moved up and I eventually closed the spread bet and I was happy with the tax free profit. But the share price kept on moving up to a level I felt was just wrong, so I went short but the price kept moving up so I closed my position and was not badly burned. The price kept moving up so I felt obliged to go short again and as luck would have it, the price fell by over 15% and I all was well with the world.
This got me interested in spread betting again and I figured that last year I had had 43 successful days and one bad day. Ok, not quite true as looking back I see that of the 43 days I made a profit on 30 days and a loss on 13 days.
I figured out that if I was going to do it again I needed a strategy which I had to stick to. The strategy was not struck on day one but evolved as the days passed. It basically involved focusing on just a few shares, all of them FTSE 100 and becoming very familiar with their price movements. This involved staring at a computer screen for long periods of time but as I was already doing this anyway, it was no hardship.
I set aside 50,000 and decided to trade in lots of 25,000- 30,000. As spread betting only requires a margin, in my case of 25% I could effectively have 8 trades of 25,000 on the go at any one time.
This time around I was very risk aware and the aim was to close a position once it had moved up 4-6 points ie a profit of 200-300 was generated. The caveat here is that it depended on what both the market and the individual share were doing at the time. If the order book looked strong I would let the profit run, if the order book was weak I would close it before the target profit was reached. If a position went against me, in the absence of any adverse news flow I set my own stop loss of a maximum of 5% of my capital. However I learned to take a loss if it looked like the share was going against me, but that has been the hardest lesson to learn
At first glance this seems contrary to the usual advice of running profits and cutting losses. However a lesson learned from the last time around was that often my selection would move into profit and I would let it run only to see the price fall and the profit disappear. I therefore wanted to book profits, free up the capital and start again.
With respect to letting losses run, clearly I would not be continuing with spread betting if there were too many losses of 2,500. However I had selected shares which I believed were undervalued and I considered it unlikely that they would fall by 50 points. If they did on a regular basis, my judgement was seriously flawed and I had no business trading in the first place.
A further 'risk control' was to look at the early percentage movement of the FTSE 100 and see how my shares had moved in comparison. If one was out of kilter and there was no news flow to justify the perceived anomaly, this was the time to make a trade. Whilst the preference was to go long, I was also prepared to go short if I felt an upwards price movement had been overdone.
Additionally, to minimise risk I would quite often be running a long position on one company in a sector and a short on another in the same sector at the same time, trying to open both positions when I felt an overdone price movement had occurred.
How did it go?
Between 19 March and 14 June I traded on 50 days and the profit was 43,349, an average of 867 per day. In the first 25 days the daily average was 605 and in the second 25 days the average was 1,129. There were 2 loss making days, day 4 and day 14. 29,585 were made going long and 13,764 was made going short.
I made a point of not increasing the initial pot and moved profits out of the account. In the first half I would estimate the average invested at any one time might be 25,000 i.e. 5 lots, this probably increased to 6-7 lots in the second half but I was opening and closing positions more often. I also believed that the increased daily average in the second half was from getting better at it, i.e. learning from the experiences and mistakes made in the first half.
By:
Andy Richardson
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