For those who believe in the random market theory; there will be no way of explaining how it is possible to consistently
win with spread betting. This is because they believe that trading financial markets is akin to flipping a coin in terms of success or failure with each trade that we take. In other words it is gambling pure and simple.
What proponents of this theory fail to realise is that, although spread betting is governed under ‘gaming laws’ in the UK, those who manage to be consistently successful cannot be simply flipping a coin. These traders, of course, are not betting on the price of a stock, currency or commodity going up or down simply as the result of a wild guess, but have highly systematic and thought-out plans of how each trade will be successful. Their approach to each trade will be based on the highest possible probability that their system will be successful.
The main difference between traders and gamblers is in the preparation of their stake. Unlike the example of a sports markets, where multiple variables make consistency difficult, trading focuses on the cyclical and repetitive nature of human interactions to spot potential opportunities. Trading signals based on historically high-probability chart patterns or events create the reason for entering a trade, whilst the fact that a football team won last week makes sports betting similar to flipping a slightly-biased coin.
Once the rationale for the trade has been established, a gambler may place all of his or her money on the trade, hoping for a very large return since they now have an ‘edge’ over the market. A trader, on the other hand, will have a strictly-defined money management strategy to use on every single trade. This includes knowing, before the trade has even been entered, how much to risk on the trade and therefore how far to place a stop-loss from the entry price. Most traders will only risk a very small percentage of their trading account, maintaining tight stop losses and moving these only as the trade becomes profitable.
Traders will also have a fairly good idea about the profits that they will want to gain from each trade. These will also be thought-out before the trade based on the size of the stop-loss (they will often always want profits to be at least the size of the potential losses) and also based on other factors such as support or resistance levels and news releases. A carefully-planned exit is different from gambling in that gamblers often become caught-up with the success of a profitable position and unable to exit the market for fear that they will miss further profits. A typical outcome of those without an exit strategy is that they end up holding losing trade after holding on for a recovery of their previous profits.
Many successful traders will say that spread betting is 90% psychology and planning and just 10% of the actual trade. How a trader plans and manages each trade, based on a system with clearly defined rules, will be a large indicator of how profitable they are likely to be. Gaining an edge in the markets by having a reason to enter will instantly set a trader apart from a coin-flipper. Forming rules for both how much money to risk and when to exit will make them a trader and not a gambler.
This article has been contributed by InterTrader.com, a UK based spread betting provider.