Spread betting is a form of derivative trading where you speculate on various financial markets future price movements. Below we discuss popular spread betting strategies, and how it is different from trading CFDs.
You can only spread bet in the UK with FCA regulated brokers.
Spread betting is a type of derivative product that allows you to speculate on financial markets like forex, commodities and shares. Spread betting is unique to the United Kingdom and only offered by brokers that are regulated by the UK’s Financial Conduct Authority (FCA).
Similarly to CFD trading, when spread betting you are not buying or selling the underlying asset, but rather betting on whether the market price of the asset will increase or decrease in the future. When opening a spread bet position, you put up an amount of money per price movement in the underlying assets price.
Some UK traders prefer spread betting over trading CFDs due to the tax benefits. Retail investor accounts in the UK pay Capital Gains Tax (CGT) on any profit made from CFD trading, while spread betting profits are exempt from CGT. Neither style of speculative trading is subject to stamp duty.
For example, pretend that after conducting technical analysis, you thought Barclays shares were going to increase in value. Your spread betting broker is quoting a buy price of 150p and you put up £100 per every price movement.
Say the market moves in your favour and the share price increases to 155p. Barclays share price has then increased by 5 points and you will gain £100 for each price movement the asset has increased in value. Therefore, your total gain will be 5 points x £100 = £500.
Yet, if the market moves in the opposite direction, you lose £500. Please note this is a basic spread betting example and spreads nor fees are accounted for in this example.
Similarly to CFD trading you can approach spread betting with scalping, hedging and day trading strategies.
Below we will discuss specific spread betting strategies, including:
Reversal spread betting strategies involve using fundamental and technical analysis to identify areas where trends are likely to change direction.
To execute this strategy, you open a spread bet in the opposite direction to the current market trend.
Technical indicators and tools are vital when developing successful reversal trading plans. Spread betters will often use the Fibonacci retracement tool to help determine if a financial market is experiencing a retractement or reversing. If prices go beyond the identified levels this signifies a reversal in the market.
Commonly used confirmation tools for reversal strategies include:
Say you want to place a FTSE 100 bet. After a week of being in an uptrend, your analysis suggests the index is going to experience a reversal in the short-term.
Your trading plan is to place a bet if you identify a double top candlestick pattern. If the market reverses, you’ll make a profit, but if the market moves on the same path you’ll experience a large loss.
Trend market spread betting is a popular medium-term strategy. Spread betters utilise technical analysis tools to identify a trend and then place spread bets in line with the trend.
Using technical indicators like moving averages and MACD, you can establish the start and finish of a markets price movement helping you find the best open and close positions.
Trend market spread betting is useful as it allows you to track a financial market regardless of whether you are going long or short. Yet, it’s best to decide on a timeframe to watch prior to placing a bet, and remain vigilant as trends can change instantly.
Beware of overnight risk when implementing this trading plan.
A forex pair is on an uptrend. You open a long bet position by buying the forex pair.
If the data indicates the market is going to reverse, or you reach your desired profit level, you sell the forex pair and make a profit.
In the forex pair were in a downtrend, you would sell and open a short spread betting position.
Breakout spread betting strategies come from the idea that key price points can be viewed as an indicator of an expansion of volatility or price movement.
The aim is to enter a trend as early as possible in anticipation of the assets price breaking out. If you come in at the correct time, you can take advantage of the trend from start to end.
Technical indicators used to identify resistance and support levels by spread bettors include:
Utilise limit-entry orders at identifying price points to facilitate this spread betting technique. This means if the market moves, your order is automatically placed.
Suppose gold’s current price is £1,400. After two weeks like this, the data suggests gold will break out into a downward trend.
Historic support levels identify the key price point is £1,380. To implement a breakout spread betting strategy, you place an entry order to open a short position if the price decreases below £1,379.
If the asset price falls, your order is automatically triggered and placed. If it doesn’t, you haven’t gained or lost anything.
News-based spread betting strategies suit traders that are well-versed with global political, economic and social events.
The spread betting strategies involve trading based on market expectations and news. For this trading plan to be successful, you’ll need the skills and resources to quickly analyse the information as its released.
News-based spread betting suits asset classes that experience high levels of volatility, such as commodities. Nearly every day there’s news or data released regarding commodities like oil or coal that can lead to spread betting opportunities.
Fundamental analysis tools such as economic calendars are vital when developing news-based strategies.
To be successful, you’ll need to:
Assume the votes for a presidential election are being counted in the United States. Two swing states voted differently to what polls predicted.
This leads to speculation that the USD will increase in value by 0.23 cents on the GBP.
Based on your knowledge of forex and the result of the previous election, you believe the value will not change in the short-term.
Rather than taking drastic action, you place a forex order to open a short position if the value rises by 0.20 cents.
There are key points to consider when choosing a spread betting broker such as:
To find a spread betting, you can read our Best Spread Betting Platforms in the UK list here. Our analysis found, the top 5 brokers for spread bettors are:
Justin Grossbard has been investing for the past 20 years and writing for the past 10. He co-founded Compare Forex Brokers in 2014 after working with the foreign exchange trading industry for several years. He also founded a number of FinTech and digital startups including Innovate Online and SMS Comparison. Justin holds a Masters Degree and an Honours in Commerce from Monash University. He and his wife Paula live in Melbourne, Australia with his son and Siberian cat. In his spare time, he watches Australian Rules Football and invests on global markets.