Learn About Spread Betting Strategies

Spread betting allows traders to speculate on rising or falling markets without owning the underlying asset. To assist you to better manage your investments, it's essential to apply structured strategies that suit different market conditions. In this guide, you'll learn five popular spread betting strategies and how to use them effectively.

Spread betting is an advanced trading technique that allows speculation on the price action of markets, without direct ownership of the underlying asset or instrument, but spread betting carries a high level of risk and is not suitable for all investors. As a type of financial derivative, spread bets are available across a wide range of different markets, including forex, commodities, stocks, ETFs, indices and bonds.

It’s important to note that spread betting is performed using leverage, so that only a small fraction of the total trade value is required as an initial deposit to start trading. However, as the outcome of the trade is calculated based on the total position, this means that both profits and losses are amplified. For this reason, traders should exercise strict risk management, and size their positions in accordance with their budget and risk tolerance level.

So how does spread betting work? Well, after selecting a market, the trader will speculate if the price is likely to go up or down, and open a trade accordingly. This means that in spread betting, traders can choose to go with either a long or short position, potentially benefiting whether markets are up or down, though losses can occur in either direction as well.

Should the price go as the trader predicted, the spread bet generates a profit. If it goes against prediction, the bet would incur a loss.

Of course, choosing to go long or short without rhyme or reason simply will not work, and may expose traders to unnecessary risk. In order to support informed decision-making, many investors study and make use of different spread betting strategies. This guide introduces five of the more popular ones for educational purposes

• Trend Market
• Consolidating
• Breakout
• Reversal
• News Based

This strategy is commonly used by traders aiming for medium-term trading. In the trend market spread betting strategy, the key is to identify market trends over the medium- to long-term, and place your spread bet accordingly.

Traders may make use of technical indicators such as candlestick patterns, Moving Average Convergence Divergence (MACD), or Relative Strength Index to help identify trends, and assess the likelihood of reversals. However, these indicators are not predictive and should only be used as one of the reference points to build your strategy.

How this strategy works
Once you’ve identified a price trend – whether upcoming or continuing – you’d open a spread bet position accordingly. For example, if the price trend appears upward, traders may go long. If the price trend is going down, traders may go short.

Traders can maintain trades until reaching their profit targets, or close your position when you see that a price reversal is imminent.

Also known as a range-bound spread betting strategy, this strategy hinges on identifying when markets are in a range-bound state, meaning that the price moves up and down within strongly established levels of support and resistance.

When range-bound markets are found, some traders may place spread bets accordingly, using support and resistance levels as guideposts, anticipating that prices may continue to fluctuate within the range.

How this strategy works
Using charting tools and technical indicators, traders should first establish if the market is in a range-bound state, and how likely it is that prices will stay within the range.

Next, a trader may watch for potential entry and exit points. For example, if a stock has been range-bound, trading between $100 and $130, a trader may choose to place a spread bet when the price nears the $100 level, in anticipation of a bounce back up towards $130.

It’s important to note that range-bound conditions do not always persist. Traders should watch for price breakouts as well, as unexpected breakouts can lead to losses. In this case, traders may also utilise a breakout strategy, explained next.

In a breakout spread betting strategy, traders would try to identify and bet on price movements that break through established support or resistance levels, anticipating that the price will continue in the direction of the breakout.

A breakout occurs when the price of an underlying asset (such as a stock, commodity, bond, etc) breaks under a support level (a price level where sellers are unable to push the price lower), or breaks above a resistance level (a price level where buyers are unable to push the price higher).

Traders often monitor the breakouts, which typically signal that a new price trend is forming, creating a potential trading opportunity. This is especially so when the support or resistance level being exceeded had been clearly established for a long period of time.

How this strategy works
Traders may use trend lines and other charting tools to find levels of resistance and support. When the price moves past either of these levels, – i.e., a breakout occurs – and some traders interpret this as a potential signal that the price trend is likely to continue in the breakout’s direction, which could be an opportunity for a spread bet to be placed in the corresponding direction.

The trade based on this strategy might be held until the profit target has been reached, or there are signs of an imminent trend reversal. As with all trading strategies, there is no guarantee of success, and losses may occur.

In the reversal spread betting strategy, traders would look for signs a market that had been trending in one direction would soon reverse course. By placing a spread bet in the direction of the coming price reversal, a trader can profit when the reversal does indeed take place.

How this strategy works
This strategy is all about spotting imminent price reversals, which can be indicated by broken trend lines, prices nearing historical highs or lows, or a weakening price trend. Traders can make use of technical indicators to help identify potential price reversals and spot appropriate entry points, but they are not predictive and can produce false signals.

Because this strategy tends to involve trading during periods when volatility is high, it is crucial to manage risk with proper use of stop-loss and take-profit points.

Financial markets often respond to news announcements such as earnings reports, central bank interest rate adjustments, political developments and other macroeconomic factors. As such, some traders keep a close eye on news reports as a new-based spread betting strategy.

How this strategy works
A news based spread betting strategy works best with markets that are relatively sensitive to news announcements. For instance, interest rate changes may impact the bonds market, while corporate earnings announcements can cause movement in stocks and indices.

The key is to identify such events and make spread bets to capture the expected price action. This is easier said than done, as market reactions to news are not always predictable. There could be greater-than-expected volatility due when markets react in fear or greed, or prices may even move in defiance of expectations.

As always, be sure to control your risk and limit your exposure to acceptable levels. Incorporating technical analysis to check the likelihood of imminent price action can be particularly helpful with this strategy.

Build your foundation

Start by learning what spread betting is, how it works and what features to look out for. This will help you familiarise yourself with this advanced trading style.

You should also educate yourself on how financial markets work and the basic principles behind trading them. It is also important to learn about different forms of trading so you can choose the most suitable ones for you.

Research the market you want to trade on

Spread betting may be performed on a large range of markets, each with their own characteristics. For instance, bonds are relatively stable but highly sensitive to interest rate changes, while forex can be highly volatile, depending on the currency pairs you choose to trade.

As such, it is crucial to thoroughly research the market you want to spread bet on. Take your time to understand what are the main price drivers, as well as how the particular asset had behaved during historical events. For instance, while the stock markets fell during the early 2000s in the weak of the dot.com bubble, gold saw significant growth in the following years.

Determine your spread betting strategy

We’ve covered five spread betting strategies in this guide, each of which cater to different market conditions. These strategies are not exhaustive, you can explore these five strategies when spread betting as part of your risk management strategies, but know that there are several more strategies that may also be used.

As you grow your spread betting skills, you should continue to educate yourself on different spread betting strategies. Doing so gives you more options, allowing you to respond quicker to changing market conditions. However, no strategy guarantees success, and all trading involves risk.

Open a position

Once you’ve studied and decided which market to trade, and the spread betting strategy to use, you may decide to open your first position.

To do so, you will need to put down an initial deposit equal to a percentage of the total trade value. The amount will depend on how much you want to bet per point of price movement. It is important to ensure your position size is aligned with your budget and risk tolerance to avoid overexposure.

You should also prepare additional funds to meet margin calls, which can happen should the market moves against you and your position exceed what your initial deposit can cover. Hence, it is important to choose your position size carefully, so that you do not overtrade and exceed your financial ability to repay losses.

Consider using risk management tools such as setting stop loss and take profit levels that are aligned with your trading budget; this will help you control risk by keeping your risk-reward ratio to acceptable levels.

Monitor and then close the position

Monitor your position and keep track of how your trade is going. Being proactive can help you respond to unexpected movements and assess when to exit.

Once your trade has reached your profit target or has come close to your pre-defined acceptable loss level, you may choose to close your position, settle up your account and look for your next spread betting opportunity based on your strategy and overall risk management.

Spread betting is a leveraged product and carries a high level of risk to your capital as prices may move rapidly against you. You could lose more than your initial investment and in that situation would be required to make further payments. As these products may not be suitable for all clients, please understand the risks sufficiently and seek independent advice, where necessary.