Okay, it took a bit longer for me to define a strategy for this project. And I didn’t want to start using the spreadbetting account without it on Monday. Blind betting without a clear strategy is gambling, very dangeroug gambling…

On the other hand, starting one day later means that I will lose all my money one day later, too, right?

1. Spreadbetting basics

First of all, I have looked up the spreadbetting basics. Apart from the info from Wikipedia, ETrade has also got a nice guide about the matter. It works much easier as I thought:

Let’s take as a betting target the DAX (german stock index). In the spreadbetting account you see 2 prices for DAX: BID and ASK. You always buy at ASK price and sell ad BID. In DAX, the difference between bid and ask are 2 points (in ETrade).

Example:

(6874-6876) Bid-Ask

Now, if you think that the prices are going up, you buy at ask price. And after the index rose X points, you cash out by closing the position: you sell at bid price.

Example:

- We bet $5 at 6874-6876 that the prices will go up (buy $5 at 6876).
- The prices rose to 6880-6882 and you decide to cash out (sell 5$ at 6880).
- Therefore, you have won $20 (6880 minus 6876 = 4. And 4 times $5 = $20).

Notice, that, in fact, DAX rose 6 points, but you only got paid for 4. The 2 points of the bid-ask “spread” are kind of “commission” the spreadbetting company gets. So, in the example above, if you buy at 6876, the index has to rise at least 2 points just to break even.

The bid for falling prices works just the same: you SELL at BID price, and you BUY at ASK to close the position later.

2. Defining the rules:

The essence of steady, constant progress is moderation: an equilibrium between risk and opportunity. It is better to go slow, but steady than to speed up and hit a wall at the end. Even in such a risky and volatile investment product like financial spreadbetting you can minimize a lot of risks by limiting yourself with a few pre-defined rules :-) Here are mine: 

• I will only be concentrating on one index: DAX
• I will play rising courses only. Playing both can be confusing and confusion is very risky. Therefore,
• confusion is our enemy. It gets you out of control. Avoid it by always knowing what you do. If you are not 80% sure, then don’t.
• Bet only few times/day. Less betting minimizes the risk of losing!:-) 1-2 times a day is more than enough. If you bet more, first, it is much more probable that you will hit a huge price spike/fall and lose all your money and, second, playing more affects you psychologically and can lead to unlogical, very subjective and, therefore, very risky decisions.
• Have an objective primary strategy that you follow (with small variations depending on the current situation).

So, these were my 5 limitation rules, like speed signs on a highway. Before defining a strategy, I needed a theory based on past experience, though. In other words, I had to study the past DAX behaviour and then do a strategy.

I will publish my findings in the next post. Gotta go.

For now, farewell.

Financial spreadbetting is the most risky, volatile and speculative way there is to make profit in the financial world. It’s more like betting in the casino or in a horse race. In fact, the profit You make with spreadbetting is tax-free in the UK. I don’t know whether it is the same in the US.

While trying to make profit with financial gambling is like playing russian roulette, I have decided to try myself in this area and report the outcome. After all, I have a decent knowledge about the market, investing and statistical calculations. And, like in casino and horse races, knowledge is what makes the risk/chance relation to work in player’s favor.

For this purpose I have opened an account at ETrade Spreadbetting with an initial deposit of 150€. That’s the max I can afford to lose on this project for the sake of the science!

I have also chosen to play real money instead of demo account mainly because of two reasons:

• First, we humans tend to make different choices when it comes down to the “real thing”. It is like playing poker: You would probably play more conservatively with the real cash bets. For this project, I have decided to make it as real as possible and, therefore, play real.
• Second, should I win something, I would hate not being able to withdraw my winnings just because I have chosen to play a goddamn demo.

As I never did spreadbetting before, the first step will be to investigate and learn the basics. Then, I will have to chose which stock/index to play, study it and develop a sound strategy. Lastly, I will play my strategy and pray that it works and doesn’t affect my objective thinking.

Results and updates to follow, stay tuned!