It is possible to profit and make money spread betting on the financial markets, if you buy low and sell high, or sell high and buy low. But as with any form of short-term leveraged speculating on the financial markets, it may be harder than you think.
If you look in our comparison tables of spread betting platforms you can see that less than 30% of retail traders make money spread betting.
I have worked in the spread betting industry for more than 20 years as a broker, research provider and reviewed and there are some common themes that are consistent in profitable spread betting traders. In those two decades, I’ve dealt with all sorts of clients from absolute beginners to large institutional hedge funds and from that here are some tips on how you can increase your chances of making money from financial spread betting.
Can you make money spread betting on the financial markets?
The simple answer to this is yes. Spread betting provides access to an unprecedented range of markets. The simple fact of the matter is that markets do one of two things. They either go up or go down. It is the rate at which they do so and whether you pick the right direction that determines if you make money.
Spread betting is not like placing a normal bet where your losses are capped at the initial stake. You are betting a certain amount per point move of an asset.
If the asset is priced at 100, it means that if it goes to 0 and you have bet £1 per point, you can lose £100. So for a £1 bet, your potential downside is 100x your stake.
On the plus side, if the price goes to 500, you make £400, which is a monster return for a £1 bet. You can read our article on how spread betting works here.
Making money from spread betting isn’t something that just happens, you will need to plan and to stick to a strategy to stand the best chance of making money from spread betting. Many spread betting and CFD traders lose money.
You will also need to budget carefully and do your research before you begin.
One of the most important factors in spread betting is choosing a broker you are comfortable and happy with. A good broker can offer much more than just the ability to make trades but also advice, educational tools, strategies and market insights.
There are many factors involved in choosing the right broker, including; liquidity, financial stability, range of markets, spread width, and educational and research tools. Read our guide on how to choose the right spread betting broker before you open an account.
Spread betting strategies that can increase the chances of making money on the financial markets
There are some key principles that all spread betting traders should adhere to if they want to make money.
If not, you may find that paying a bit more attention to your strategy, discipline and objectives will make a big difference.
A strategy is key to spread betting. Having a clear idea of how you want to trade will give you the best chance of maximising profits and reducing losses.
If you are just getting started in spread betting and looking for a basic strategy that promotes good trading, we’ve put together a quick summary of three simple strategies that should help you find your feet.
It’s tempting to smash straight into the market and trade as large as possible. But this is the quickest way to lose your money. When you get started, bet small amounts relative to your account size. This means that if you have £1,000 in your account, allocate no more than 10% of that to the margin of each trade and keep at least 50% free for variation margin (covering your profit and loss).
The principle is the same if you are trading with £100k. You shouldn’t use more than 50% or £50k as an initial margin or have a single position that accounts for more than 10% of your account. Spread betting brokers provide access to well over 3,000 instruments to trade and having a diverse range of positions will spread your risk.
If you have two large positions and one moves against you, it can quickly wipe out your account. Having lots of small positions will help you manage your profit and loss more effectively.
Cut your losses, run your profits:
The most important part of any spread betting strategy to remember for beginners is to always cut a losing trade and run profitable ones for longer.
The best traders in the world only get it right about half the time, but what makes them good traders is that they are not in a rush to take profits, and realise when they have called the market right to let a position run and bank big wins. If you call a trend or reversal well, there is more to be gained from adding a trailing stop and profit limit than taking a quick turn and looking for another opportunity.
Equally important is cutting losses. Like profitable trades left to run, possibly equating to big profits, losing trades kept open with the hope of recovery can lead to large losses.
If a position or trade is not doing what you hoped, cut it out and keep your powder dry, and move on to the next trade.
Winning spread bets don’t necessarily make profits
In 2014 Joshua Raymond, who is now at XTB, but was then the City Index resident market strategist wrote a nice article on Linkedin, which is basically about how unfair it is that everyone assumes that 90% of spread betting traders lose money.
There were lots of data, charts, and information about how actually 60% of trades in a month were profitable.
But no actual information about whether the net profit or loss was positive or negative. One would have to assume that as this is basically an article promoting spread betting that if the clients were net up at the end of the month, they would have said so.
Placing winning trades is not difficult. It’s actually very easy to get bets right. After all, the market will only do one of two things. That is, it will either go up or down and you are either right or wrong. And with even the most basic use of market timing, a trader can get an edge. However, the difference between good and bad traders and those who make money is the trading strategy employed once a position is open.
It is well known that traders and investors do not get it right all the time. That is why diversification and breathing room are the foundations of trading. Where investors and traders always go wrong is that they cut profits too soon and let losses run on for too long. What traders should do is cut losses and run profits.
However, as with all gambling, spread betting (unless it is being used by professional traders or hedgers) is primarily the playground for “fun money”. Fun money being a small percentage of an overall portfolio allocated to high risk, high reward trading strategies. Therefore it’s usually emotion that gets the better of traders.
The thing about losses is that they can get seriously out of control very quickly, which can result in one losing trading wiping out the profits of ten profitable trades. That is a more realistic overview of why people say that 90% of spread betting customers lose money.
Of course, if you want to improve your spread betting strategies you can study up by reading spread betting books. These books don’t promise to make you rich, what they do is help consistent approach to financial spread betting.
Finally – if you want to make money spread betting, make sure you choose a broker that is on your side:
Some spread betting brokers are better than others. Some bet against you with a B-Book and some hedge all of your trades in the underlying markets.
As spread betting is commission-free (the charges are built into the spread and overnight fee), it’s easy to become complacent about which broker you use.
Tight spreads and low financing charges are the key to efficient trading. If you are jobbing in and out of positions every day, trading with a broker that offers even slightly tighter spreads can increase your profits by up to 20%.
- For more information on spread betting brokers, read our guide to the best spread betting platforms.