Opening and Closing a Trade

The Beginners Guide to Placing a Spread Bet

The process of trading using spread betting is relatively straightforward. The following examples demonstrate how you should execute a long trade if you have ascertained that the price of an asset will continue to rise. As you can confirm, this process involves only the minimum amount of decision making.

Step 1: Choose an Asset

Step 2: Choose the Direction (Long or Short)

Step 3: Choose your Stake

Step 4: Select your Trade Size, Entry Position, Stop Loss and Exit Position (Take Profit)

Placing a Long Bet

You will need to execute a long trade whenever you have assessed that an asset price will proceed to climb in value. For instance, you should aim to activate a ‘long’ spread bet by identifying firms or assets that are undervalued so that you can profit from their shares subsequently appreciating in value.

cts_long_trade

Example of a Winning Long Bet

Envisage that your spread betting broker has offered you a spread on the stock of a particular company. The buy price quoted is $250 and the sell price is $245 producing a spread of 245-250. Consequently, you elect to bet $5 per point on the shares of the firm climbing above its present purchase value of $250.

At expiration, imagine that your prediction was correct with the value of the shares surging to a new buy value of $335 while the sell price rose to $325 producing a final spread of 325-335. Your profit is determined as follows:

The difference between your initial buying price of $250 and the final selling value of $325 is 75 points. You would therefore collect a payout of 75 * $5 = $375.

Example of a Losing Long Bet

If you decide to speculate on the spreads of assets as opposed to seeking direct ownership in them, then most experts consider that this is a valid and sound strategy. This is especially so if you can forecast the correct direction in which the price of your selected assets will advance, as shown by the above example.

However, you must appreciate that the risks involved are substantially higher when you spread-bet as opposed to other standard forms of investment. To understand this concept better, consider the following illustration.

Imagine that your spread-betting broker has quoted you a spread of 440 to 450 on a certain company. You decide this time to bet $10 per point on the stock climbing above its buying price of 450

However, this time your forecast is wrong as price slumps to record a final spread of 355-365. Consequently, the loss you will now incur can be deduced as follows.

The difference between your initial opening buying price, i.e. $450 and your final selling price, i.e. $355 equals 95 points.

Your loss at expiration will there be 95 * $10 = $950. By placing such a bet, you would have suffered a loss of $950.

In particular, you must note from studying the two above examples that although the absolute difference in the spread movement is exactly the same in both cases, your loss would have been greater than your profit. This is because of the size of the spread which is the commission charged by your spread-betting broker.

The two above examples clearly demonstrate the increased risks of spread-betting. In order for you to consistently achieve worthwhile profits, the price movement of an asset must exceed at least the spread size in order to just breakeven.

In order to attain a deeper appreciation of these concepts, let us now evaluate some more examples together with their associated trading charts.

Another Long Trade Example:

The diagram below demonstrates the trading performance of a particular firm over an extensive time period. Envisage that after studying this chart, you opt to execute a long trade at the point denoted by the arrow as you have concluded that the price of the firm’s shares will continue to appreciate in value.

5sp1

The following diagram expands that right-hand portion of the above chart so that you can evaluate more precisely how this trade progressed during its lifetime.

5sp2

Imagine that your spread betting broker quoted the following spread data for this specific firm which you utilized to assess the validity of executing a long trade. As the above diagram illustrates, the mid-price of the spread on offer was 284 as its sell value was 282 while the buy price was 286 generating a spread size of 4 points.

These features of this spread bet imply that your opening price would be $286 if you decided to back your analysis by activating a long trade. In other words, you are expecting that the share price of this company will continue to climb. Envisage that you also opt to wager $10 per point.

As the chart above verifies, your prediction was correct enabling you to eventually record a profit when your position closes at a mid-point value of 351. As such, the final spread is 349 and 353 producing an unaltered size of 4 points.

When you close a spread bet you will always do so by using the quoted sell price which will now be $349 in this case. Consequently, your profit can be determined as follows.

The difference between your sell price, i.e. $349 and your initial buy value, i.e. $286 is 63. As such, your profit equals 63 times $10 producing a $630 return.

Comments are closed.