I think that gold will catch a few people out this year. It will be interesting to see which side you are caught.

Will gold deliver another glittering year in 2012? – Telegraph
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8973351/Will-gold-deliver-another-glittering-year-in-2012.html

Is it a wise decision to buy gold at present? The asset – famously given as one of the gifts of the magi – is seen as the ultimate “safe haven” investment in times of political instability, economic turmoil or rising inflation.

Given world events this year – the Arab Spring, financial crisis in the eurozone, economic stagnation in the West, and the inflationary effects of central banks printing money to keep credit markets liquid – it is not surprising that the price of gold has risen again, after a decade of strong gains.

According to figures from the World Gold Council, the price of gold was $1,596 per ounce just before Christmas. (Gold is traditionally priced in dollars and is still weighted by a medieval measure called the troy ounce, which is just over 30g.) This is up from $1,420 at the beginning of the year, and an increase of almost 500pc from the price it was trading at ($278 per ounce) on Christmas Eve 2001.

(via Instapaper)

I hope by now that you have come to the conclusion that you need a stop loss as part of your financial spread betting system.

So where do you place your stop loss on each trade? There are many different places to put them and I will go through a few now. What you need to do is select one or more that suits your trading style.

The length of time you expect to be in a trade will be a determining factor as well as your personality. How do you react to a losing trade? If you are like me then not well but as you see this more of a system then you don’t take it personally.

When thinking about your stop loss position you have to place them far enough away that they won’t be affected by market ‘noise’ but also not too far away so that your losses aren’t too big.

Know you ATR…

There is a lot of random movement in financial markets called noise. You don’t want to set your stop loss within a range that will get stopped out too early.

A way to overcome this is to calculate the Average True Range (ATR). The ATR averages out the highs and the lows over a time period. The more volatile the asset, the higher the ATR will be.

You need to set the time period and you need to set that in context of the anticipated time in the trade. If you plan to be in the trade for a couple of weeks then you need your ATR to go back further than you would if you only plan to be in the trade for a day.

Where is the support/resistance?

A popular way to determine you stop loss position in financial spread betting is at support and resistance levels. For those who don’t understand the theory behind support and resistance there will be an upcoming post on it.

Once a support/resistance level has been found you need to set your stop loss just outside this i.e. once level has been broken.

Be warned that because this is a popular way of determining stop loss levels that the price can move very very quickly. Even if you have automatic stops in place the price might move so quick that you miss them.

To try and mitigate you can place your stop on unusual numbers and avoid rounded numbers that other financial spread betting traders will use.

Outside your M.A…

A popular financial spread betting system is the use of moving averages (M.A) to initiate trades. If you are entering your trade based upon a M.A. then it makes sense that the exit should be on the same principle.

The problem with M.A. is that they are always moving. So do you move your stop loss? Well that depends and I will cover that later in this post.

Cash exposure…

This will only really come about if the size of your bet is the same for each bet that you make. I don’t set up my trades in this way but some people do. Say you bet £10 per point on each trade, if you want to restrict your potential losses to £100 then your stop loss should be ten points away.

Your time has expired…

Now I’m not impatient. In fact I would day that patience is one of my qualities. Having said that though if the trade isn’t going anywhere for a certain period of time you have to hold your hands up and move onto the next trade.

Now this can be extremely frustrating especially if you see the trade move in your favour once you have exited but you need to consider that money is tied up in the trade and can’t be used elsewhere.

I don’t now of any financial spread betting accounts where you can exit automatically after a certain time period so this would have to be a manual stop loss. Select a period and if it hasn’t really moved after that point then exit the trade.

Moving your stop loss

Should you? Well you should only ever move your stop loss to reduce your exposure. If your trade goes the wrong way, don’t move the stop loss to increase you exposure. The trade was wrong, it is not your fault but you have to exit with dignity.

Just because your trade had exited it doesn’t mean that you can never re-enter. If the conditions become right again then by all means jump back on.

What if the trade goes in your favour?

By all means move the stop loss to reduce exposure. As with anything in financial spread betting, there are always trade offs. Moving your stop loss to reduce exposure increases the likelihood of being stopped out by noise.

How should you move your stop loss?

As we saw when setting the stop loss, there are a number of different ways to move it. For simplicity I like to go with a similar method to how the stop loss was initially set.

So…

ATR – If you initially set your stop loss at 2 ATRs, then recalculate how far this is away from the current price and adjust your stop loss accordingly.

Support and resistance – Has any new support and resistance levels developed? You may be struggling to adjust stop losses in this way so look out for another on the list.

M.A. – These are bound to change. What are they now showing you?

Cash exposure – Continuing the example above… the price moves in your favour by 10 points. You now move your stop loss by 10, so in this example, to you entry point.

It is important to understand the different ways of incorporating stop losses into your financial spread betting system. Yes they are flexible but sometimes you want them to be rigid to keep you under control.

Remember that although it can be extremely frustrating if you get stopped out, you can always re-enter the trade at a later date. Never…never move the stop loss to increase your current exposure.

Also, before I end this post about stop losses, if it important to know which prices your financial spread betting firm are using. Are they using own spreads, market mid prices etc. This is extremely crucial when placing stop losses around support and resistance levels.

The stop loss will exit you if something goes wrong. Before we move on to where you should place your stop loss I want to talk about the different types of stop loss systems you can use.

Manual Stop Losses

Firstly you have the manual stop loss. This is where you know your exit point and when it reaches that point you log into your financial spread betting account and initiate the exit.

I don’t like this method. Whilst it may prevent some of your trades being stopped out from random noise i.e. by the time you go to trade the price is back to normal levels, I think its disadvantages outweigh that advantage.

To start with you need to extremely disciplined. A new trade may say he or she will adhere to the stop loss beforehand but when it comes to pulling the trigger it is often easier to see a paper loss than an actual loss. A paper loss gives someone (false?) hope of a recovery. An actual loss is money gone.

Secondly, you have to be quick. Price movements can move against you very quickly. You have to be ready and you have to be prepared. What if your internet connection is down or there is something else that prevents you from exiting the trade? You are fully exposed by using manual stop losses.

Automatic Stop Losses

One thing I would expect from my financial spread betting company is the ability to trade with automatic stop losses. You set the price you wish to exit the trade and once the price reaches that level your trade is triggered.

It is important that you understand the price your stop loss will be triggered at. Will it be at the mid price, the market spread of the firms spread? You need to check this with your financial spread betting firm.

The advantages of automation mean that you don’t have to rely on yourself pulling the trigger. It is taken out of your (reluctant) hands. It is quick, relatively painless and you can then move onto the next trade.

It is important to note that just because you tell your financial spread betting company to exit at a certain price it doesn’t necessarily mean that you will definitely get that price.

Sometimes prices move so quickly that your price is missed and you get the best price that you can. To take an extreme example…

Say your stock loss on XYZ PLC was 2% below the current price level. If the company released a profit warning over night and the price in the morning opened 20% below the previous close, your trade will be exited at the opening price.

And that moves us on nicely to guaranteed stop losses.

Guaranteed Stop Losses

We saw that with automated stop losses that although the trade will be triggered automatically, you don’t necessarily get the price you wanted. With guaranteed stop losses, as the name suggests you do!

So why doesn’t everyone use guaranteed stop losses then? Well, they come at a price. Some firms don’t even off them at all but for those that do they often they charge for them. This is because they are saddled with more risk.

As financial spread betting becomes more and more competitive I can see the price of guaranteed stop losses coming down. This will be a good thing for us.

Which type of stop you go for depends on you trading style and your own preferences. Whether you go for a guaranteed stop or automatic you have the weigh up the advantages of the guaranteed stop loss against the extra cost.

At the very least you should have an automatic stop on each trade.

In the next post I will be looking at where to place your stop loss when formulating your financial spread betting strategies.

I can’t understand why any trader would be against the use of stop losses. A stop loss is a tool that you can use to your advantage. It is your friend… it will look out for you if the market turns against you or heavens forbid… you make a wrong call!

There are successful investors who don’t have stop losses but investors are different to traders. I am assuming that you are financial spread betting because you are trading for the short and medium term.

Investors may say they can afford to wait for the price to recover but I don’t want to.

If I haven’t made my position clear let me try to one more time…

A stop loss in financial spread betting is an absolute MUST!

As traders, we get things wrong and that is something we have to accept. Even the best traders are often wrong more than they are right. The key to financial spread betting is cutting you losses quickly and letting your profits run.

Stop losses keep you under control. When you are financial spread betting you are using leveraged products and things can go wrong very quickly. That is not to say that you are 100% covered with stop losses but it will go a long way in protecting you.

I found the book on Amazon. It had been given a high recommendation from others who had bought it so I decided to give it a go.

It is written more as a story than an informative book. It is a story about a dancer, Nicola Darvos, who had spare money who wanted to start investing. He got involved with buy and selling equities.

He describes his early days as his ‘gambling stage’. He would follow all tips he heard whether he read them or got them from his broker.

Not surprisingly he lost money.

Not disheartened he continued and his investment style changed over time… more so from necessity and his changing environment. As a dancer he went on a world tour and therefore could only access limited information about his equities.

He could only get information wired to him through telegrams so he needed to limit the amount of information his was receiving. He only had basic price data.

This is where he moved on to what he calls his ‘technician’ stage and it is when he developed his ‘box theory’.

At last he started to have some success!

He then went to refine his strategy once again by combining price data with information about fundamentals. He calls this his ‘techno-fundamentalist’ stage.

The story continues to show that he goes on to nearly lose all that he accumulated so far but after taking a step back…really getting in tune with his trading style went on to make $2,000,000. He did this in just 18 months starting with $10,000!

This book is a really exciting book. There isn’t that much in terms of depth into the system but it is one of the most exciting books I have read on trading. He may not have used financial spread betting but he did trade on a margin and we can learn a lot from him.

One lesson that struck a real chord with me was about letting your winners run. We all know that in financial spread betting it is important to do that but as we all know it can be extremely difficult.

I have not read this book for a couple of years but it was the first one I wanted to share with you which should say a lot.

If you are in any way interested in financial spread betting then you will find this book truly inspirational.

The first is an introduction to futures. This used to be the most popular method used by traders (in fact it used to be the only way). Over recent years it has declined in popularity slightly due to the rise of other different types of bets available.

So how do futures work? Well the initial concept was invented centuries ago as a way of protecting the purchaser and the seller from volatility in the spot price. The spot price is the current market price.

By taking out a futures contract you knew the price that you were going to pay for a particular commodity many months in advance.

Then traders started to enter the market as it allows them access to different types of classes of assets without having to take delivery of the physical asset. This market still exists to this day and you can take advantage of it through financial spread betting.

So how are the futures prices determined? Well as you can imagine that the spot price is a major factor of valuing the futures contract. If the spot price is higher then futures price is likely to be higher too. As well as the spot price you need to consider the ‘cost of carry’.

As you aren’t paying the full amount up front, you only pay the margin requirement, the current interest rate is a determining factor of the futures price. The higher interest rate, the higher the price of the futures contract.

Specifically in the case of stocks, any potential dividend payment affects the price and if you are going long (buying) you can get the contract at a better (cheaper) price.

As with anything financial spread betting related there is a spread. You need to consider the spread of the futures market as well as that added by your financial spread betting company.

For more on different types of trading check out my binary bets post.

The number of markets that you can make binary bets on is limited compared to that of other financial spread betting markets but in recent years that number has been increasing. The most popular market for binary bets is probably indices.

Binary bets are very short term usually lasting a day at most. There are usually only two outcomes so you are either right or you are wrong. It doesn’t matter how right you are or how wrong you are, all that counts is the overall outcome.

I will explain by the way of example… the FTSE100 is trading up so far in the session and you are confident that it will be up at the end of the day. You have no idea how much it will be up, you don’t care as long as it finishes up. In fact, it can fall from the point where it is now as long but as long as it finishes in positive territory at the end of the day you will win the bet.

So in the above example you want to place a binary bet on the FTSE100 finishing up. You go to your financial spread betting account to get a quote for that bet. You are quoted 60 – 55. This means that if you place a bet of £1 and you win (i.e. FTSE finishes positive), then the amount that you win will be £40 (= (100 – 60) *
£1).

If the FTSE doesn’t finish up then you lose your bet and you lose £60 (= (0 – 60) * £1).

The reason that I think the binary bet is becoming more popular as financial spread betting system is because of its transparency. You know what you will win or lose at the start of the bet.

They are great short term trading instruments and as you can imagine, the prices move throughout the day so you can even trade out of your bet before the end point.

Example continued…

We might have placed the above bet in the morning of a trading day. As the day goes on, even if the value of the FTSE doesn’t really move, then the price trade is likely to go in our favour as there is less time (and therefore less news likely to emerge) for the situation to change. In this situation you could trade out of the bet before the day’s end at a profit.

The disadvantage of binary bets is that they aren’t currently regulated by the FSA. This may change in the future as more financial spread betting is done this way.

Binary betting can be a little frustrating and conversely a great relief. Imaging putting the above bet on and you were right. Not only were you right, you were very right. The market rallied to a record day. You would still only win your £40.

Looking at it the other way though. Imagine you were wrong, very wrong… the market tanked. You will be grateful to know you still only lost your £60.

You need a system.

So what should your financial spread betting system be? Well I will be going into what you can use as a financial spread betting system in later posts but wanted to introduce the idea of having a system now.

You need an edge; you need something that will produce you returns over the long run. Obviously your edge doesn’t have to mean you are right every time but should yield a positive expected return.

“Can my system be hunches or should it be systematic?”

There are traders that can make money through hunches, I don’t know any though! I know traders who make money from systems.

I will be doing a book review of ‘How I made $2,000,000 in the stock market’. It is by a dancer called Nicolas Darvas. He didn’t have a proper edge when he started out and he lost money, quite a bit of money but…. then he developed his edge. The title of the book gives away what happened next.

When you are starting out you may not have a financial spread betting system to use. What should you do then? Well, you have 2 choices, you can use someone else’s (preferably a successful trader) or you can develop your own.

Either way you need to ensure that while you are testing your edge that you aren’t risking too much per trade. I think it is safer to buy a book written or attend a seminar by someone who has been successful with trading (it doesn’t necessarily have to be somebody who has been successful in financial spread betting itself) and use his or her systems until you develop your own.

I will be doing a number of book reviews which I hope will put you on the track of some great informative books that should help you find a system. I would be grateful if you contact me with your book review suggestions too.

So if you are developing your own financial spread betting system then how should you go about it? There are 2 types of testing that you can do, there is in the field testing and there is back testing.

In the field testing is when you actually trade the system live. You can test with actual money or you can paper trade. I would advise that you paper trade to begin with but if you do test with actual bets then keep the bet size small.

Back testing is when you run that test against historical data. The advantages of this type of test are that you can get your results almost instantly, you can test the system across many different markets and over different time periods and you don’t risk a penny.

There are some disadvantages associated with back testing data. Just because the system was successful in the past it doesn’t mean it will be successful in the future. Also, just because it didn’t test well that doesn’t mean that from a bit of tweaking it won’t work well in the future, trading live could point you in that direction.

You need to do back testing over multiple time periods as some systems can seem really successful but then when you change the periods slightly, the whole performance falls off. You want a financial spread betting system that is robust and will have a positive expectation of making money in the long run.

It is probably best to combine the 2 methods. Do a bit of back testing first followed by small tests in the field. Even if you are using another trader’s strategy do some small tests in the field before you throw too much money at it. Systems can suit certain individuals more than others.

In my last post I spoke about the possibility of opening a second account. This may not be as important to you when you are just starting out and have a low level of capital but do keep it in mind.

There are a couple of reasons why you should consider it if you are to take your trading seriously. The most successful traders out there have a number of accounts.

The first reason for this is the ability to get the best quote. Financial spread betting is hard. Anything you can use to your advantage is great, even a half a point on the spread will make a difference.

By having more than one financial spread betting account you will be able to read multiple quotes at the same time (with a little practice!). You will then be able to trade of the better one.

It will take time for you to reach this level but if you can trade this way then you will be ahead of a lot of traders.

The second reason is contingency. These days spread betting trading platforms are a lot more stable. They don’t hang as much and they are very rarely down. The spread betting companies put a lot of time and money into making sure that this doesn’t happen.

But…

What if it does? What if the financial markets are going crazy and you want to trade? When you log on…whoops…you can’t log on.

Do you think you will be able to get through on the phone if this is the case? Not a chance…that is what everyone else will be doing.

A second account should be able to get you through an event like this.

There is some really great news for us here. There has been a massive rise in the number of financial spread betting companies coming into the market over recent years and they are fighting with each other so that YOU select them.

You are in the driving seat – You are in control.

The great thing about this is the facilities they offer keeps improving, the customer service is getting better, the range of different types of bets keep growing and probably most importantly the cost of trading is coming down.

More financial spread betting companies means more choice and sometimes that causes a headache for some people. This blog post doesn’t recommend any account specifically; it acts as a checklist to stop you from feeling so overwhelmed.

One thing to remember before we begin is that you can change your mind in the future if you wish…you are not stuck with them forever. You can change to another financial spread betting company so don’t worry too much.

After that (very) long introduction shall we begin?

Dummy / Practice Accounts…

Whenever you read a book or view a website for beginners they tell you to do some paper trading first. Now you can set this up on a spreadsheet and that would be fine.

With paper trading you do miss out on the emotions that come with real trading and the potential of losing real money. You should do you best to replicate the conditions that you will be using when trading live to really get the most out of it.

This means using a financial spread betting platform and many companies offer a dummy account for you to try. Why not try the account out and practice at the same time?

With these practice accounts you can sometimes choose your starting capital. Don’t go crazy… pick the amount that you will be starting with, it will make it more realistic.

Customer Service…

This is crucial to me. If I have a problem I would like to be resolved as quickly and painlessly as possible. I want a choice of emailing or telephoning the company.

But how can you assess the customer service before you open an account?

Even though the new account literature is on the internet for all financial spread betting companies these days…why not call them and ask them to post it to you? This is your chance to put them through their paces. If they aren’t good at dealing with potential new customers then how good will they be if you are an existing customer and have an urgent problem?

Think about checking out trading forums on the internet. Word of warning here… people like (love?) to moan. I would advise not to read old posts. Instead, start a new topic asking people to recommend a financial spread betting broker, you will be surprised how many will share this with you.

Review sites can also be good but watch out here also. Often the person reviewing the site will receive a referral fee if you sign up after clicking on their link. Make sure they have used the service themselves. Why not ask them questions?

Best value…

Why are you financial spread betting?

To make money?

Thought so.

In that case you want keeps the costs of a trade as low as possible. Now with spread betting you don’t pay commissions, financial spread betting firms make their money through the size of the spread. It is at this point that you may want to think about opening at least 2 different accounts (more on this to follow).

Bet Types…

In financial spread betting there are many different styles of bets. It is important that you understand each one and I will be doing a post on these shortly.

Now you need to ensure that the account offers the style of bet you want. If they don’t then obviously you need to look elsewhere.

As I mentioned earlier, the increased number of different financial spread betting companies means that they are offering a greater variety of products these days for you to chose from so I hope that it won’t be a problem for you.

Different levels of accounts…

You will often find that a financial spread betting firm will offer a range of accounts. Sometimes I get a little confused by which one will be suitable for my needs!

The determining factor is usually the level of experience that you have. The golden rule is that if they are offering credit then they are for the more experienced trader.

If you in anyway confused about which one to choose then give the company a call and ask them. This is another great way to test their customer service.

Minimum capital requirements…

These days they are generally quite low. You do have financial spread betting brokers that do have higher minimum thresholds.

I remember using a practice account when I first started out, it was ok and decided that I wanted to open my first actual account with them. The problem was they had a high minimum capital requirement to get going so I decided to walk away and go elsewhere.

One way of getting around this is putting some money into the account that you don’t want to use for trading. You then need to be thoughtful of the opportunity cost of it just sitting there doing nothing.

Minimum bet size…

This will be extremely important to those of you who are just starting out. It is important because the size of your bet will determine the amount of money that you are risking.

This was definitely one of the most important of all the criteria for me when I started out. I am quite patient and disciplined so I wanted my bets to be small when I started.

Again the competition amongst brokers has meant that the minimum bet sizes have fallen. This is great news and I expect (hope) they will continue to fall in the future.

Margin requirements…

As you should already know, when you are financial spread betting you are dealing with leveraged products. You need to know the margin requirements so you know how much exposure you have and avoid being subject to any margin calls.

Additional account functionality…

What other functions do you need to trade? Stop losses? Do you want these guaranteed? How much does that cost? Can you set up contingent orders?

Write down each function that you want the account to offer and tick each one off as you check out each account.

How good is the trading software?

Now I understand that you are likely to have your own software for analysis but you will still need to use their software to actually make the trades.

It is vital that you can use it and that it is both reliable and quick. The last thing you want is to press the trade button and for it to hang there for ages, worse still…crash.

This is hard to check with dummy accounts as they often run off different systems to the live accounts. Again you can ask in forums for other traders’ opinions on financial spread betting firms’ trading platforms.

Do they accept trades over the phone?

This is something you need to consider as a contingency. What if something prevents you from placing your trade online? Will your broker let you call a trade through and how much does that cost?

An extra tip: Always keep the number of you financial spread betting firm in your mobile. You never know when you might need to call them.

Extra support…

It would be nice if by signing up to an account that you could get access to additional support. See if they have training or seminars that they offer. This isn’t essential and you need to be careful of any sales pitches but would be a nice extra.

Account opening incentives…

You will find these days that you are bombarded with offers to open an account. Offers can include cashback, tighter spreads for a limited time or even wine and champagne!

Now this shouldn’t be a criterion for opening an account for the long term but why not take advantage of that with a second account?

Opening a second account…

I want to talk more about this but realise that this post has gone on long enough so this will have to wait until next time…