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What is Spread Betting


Spread betting is a unique form of financial trading which allows the investor to trade in a market even though they do not actually own the options they’re trading on. Considered to be a form of gambling under UK law, any profits made are exempt from tax.


One of the advantages of spread betting is that you only need to deposit a small percentage of the product price to initiate a trade. Known as leverage, this allows traders to potentially make significant profits from a small investment, though it should be noted that while the potential rewards are greater than in traditional trading, so are the risks. Should the price move in the opposite direction, traders can incur losses which can greatly exceed their initial investment.

What are spreads?

What_are_Spreads

What are spreads?

In every market there is a buy and sell price. The difference between these prices is known as the spread. The smaller the difference between the two prices, then the narrower the spread is. Narrow spreads are more favourable for traders as the market then only has to move slightly to present the possibility of locking in a profit. At ETX Capital we offer a large range of competitive and narrow spreads for markets.


If a trader believes that the market value of a product will go up then they will buy, in order to subsequently try and sell at a profit. Conversely, if they think the value will fall they’ll sell, in the belief that they will be able to buy at a lower price and make a profit.

STOPS

Stops

With spread betting having the potential to generate big losses for a trader, it’s prudent to be able to limit how much you can lose. ETX Capital has a range of different types of stops that can do just that and we’re going to take you through them all, using the example of us having bought gold at 1315.7 and wanting to place a stop.


Regular stop-loss

If we placed a regular stop-loss at 1313.7, it would be 2.0 or twenty pips, below the current price of 1315.7. Should the value of gold drop to that level, the trade will automatically be stopped and we would sell for a small loss. However, regular stops cannot always be taken for granted and this is an issue we’ll explore in the Guaranteed Stops section.


Trailing stops

A trailing stop differs from a regular stop-loss in that if the market moves our way, the trailing stop will shift in the same direction.


So having bought gold at 1315.7 we place a trailing stop at 1313.7. The gold price rises to 1316.7 and the trailing stop automatically moves to 1314.7, retaining the same difference of twenty pips. The trailing stop will continue to follow the price if it goes upwards, but stick in place if the market value drops.


This is useful in conditions where the market is extremely volatile. Say the value of gold soared swiftly to 1325.5, only to just as quickly drop to 1311.5. A guaranteed stop would have seen our trade close out at 1313.7, missing the opportunity to cash in on a potential profit. A trailing stop would have seen our stop level rise to 1323.5 and would automatically trade out near the peak of the trading curve.


Guaranteed stops

The aforementioned stops will protect you when the markets are open, but what if a piece of news breaks that has a profound affect on gold values when the markets are closed? When the market reopens the price could be below the set stop loss. It would automatically close the trade, leaving you with a potential loss that could even be greater than your initial deposit.


A guaranteed stop ensures that even if the markets open below your stop-loss level, you will have had your trade closed at the level you set. So while regular stops can be useful for short-term trades in less volatile circumstances, longer-term positions can benefit from a guaranteed stop. There is an increased trading cost with a guaranteed stop, but the peace of mind and protection it brings may be worth the investment.


Stop orders to open

Stop orders to open are different from the above types of stops, in that they can be set to automatically open trades rather than close them.


So with gold at 1315.7, we could employ a stop order to open, to buy if the price rose to 1318.7. Or we could set it to automatically sell, should the value fall to 1312.7.


Why would we want to do this? The benefit of stop orders to open is that you can catch market trends in their infancy. So if the price of gold has been 1315.7 for some time we might be reluctant to invest, as we might not be sure as to which way the markets will move. By placing stop orders to open - either to buy just above the current value, or sell just below the current price - we are hoping that the shift is part of a larger rise or fall in the value of gold.


It’s a strategy that can reduce risk, because if the market were to move in the opposite direction to our stop order, it would have no effect, as the market would fail to hit the price at which the stop open would come into play.

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