AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES

SPREAD BETTING & CFDs22 FEBRUARY 2007 A PRIVATE INVESTMENT ALTERNATIVE

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES2

CONTENTS

What it is all about p. 3

How to get started p. 4

Alternative approach p. 4

Look deeper p. 5

Balance the facts p. 6

Your flexible friend p. 6

Controlling the risks p. 7

Making the right moves p. 7

Spreading your wings p.10

Managing your expectations p.10

Upping the stakes p.11

A question of timing p.11

Professional trading p.11

Technically Speaking p.12

Under the microscope p.12

Staying ahead of the pack p.13

Combining use of spread betting p.13with a traditional trading strategy

On the margins p.14

A question of size p14

www.mediaplanetgroup.co.uk

SPREAD BETTING AND CFDs A TITLE FROM MEDIAPLANET

Project Manager Nigel Stewart 020 7563 8892, Editor Keiron Root, Production Editor Ulrika Fallenius,Design Sophie Westerberg, Prepress Jez MacBean, Print News InternationalFor more information about supplements in the daily press,please contact Carl-Philip Thunström 020 7563 8877

Mediaplanet is the leading European publisher in providing high quality and in-depth analysis on topicalindustry and market issues, in print, online and broadcast.

www.mediaplanetonline.com

Improving accessDavid Jones (left) explains howCFDs and spread betting havelevelled the playing field whenit comes to financial markets.

The last eight years or so have seen a mas-sive change for the better for the average UKinvestor and trader. The widespread use ofthe Internet has driven down commissions,made a vast array of information availableat the click of a mouse and made the finan-cial world a whole lot smaller. In parallel

with this has been the growth in usage of products such as Contracts forDifference (CFDs) and Spread Betting – they have become an importantpart of many an active trader’s or investor’s armoury. Broadly speaking,they are considered by many as an effective way for trading or investingin financial markets, for clients with a time horizon varying from a fewseconds to many months.

CFDs & spread bettingCFDs have been used by financial institutions for many years. The CFDbusiness is now so big that it is thought to account for at least 20 per centof daily volume on the London Stock Exchange, and the changes in theindustry over the past few years mean that private investors now haveaccess to the same tools the professionals use at a cost level similar tothat of traditional stock broking.

Spread betting has been available to private investors for more thanthirty years, but again its use has risen dramatically over the past five orso years. Spread Betting and CFDs are not wildly different – the marketsavailable to trade are usually the same and both approaches, when usedfor trading individual shares, do not attract stamp duty (typically chargedat 0.5 per cent if purchased through the traditional stockbroking route).The main differences between the two products are that spread betting

does not incur commission and any gains made using spread betting arecurrently free of Capital Gains Tax (although tax laws can change).

As a general rule of thumb, both of these products simply mirror theprice of the market they are based on. So, for example, if Vodafone sharesare 149.75p to sell, 150p to buy on the London Stock Exchange then theCFD or spread bet price will not be wildly different and in some instanceswill be the same. If the price of Vodafone then rises over the next fewminutes/hours/days/weeks – whatever your individual time frame – theCFD and spread bet price will also rise. You are not locked into your buyor sell decision for a fixed amount of time (you can buy or sell withinseconds if that is your approach, or hold for as long as you want).

Two-way tradingThese products allow you to trade markets both ways. You can buy firstwith a view to selling later, but you can also “sell short”. This involvesselling first in the expectation that the market in question is going todrop and you will be able to buy back at some point in the future, but at alower level. With CFDs and spread betting, you have the opportunity totry and profit whether you think a market will rise or fall in price.

Then of course there are the markets available. If your interest is inindividual shares, there are the major companies on the London StockExchange available via spread betting and CFDs, as well as the majorEuropean, US and Asian shares. If you had a high level view on the USmarket, but were not sure which shares to buy or sell, you can move yourfocus to trade the index (such as the Dow Jones Industrials or the S&P500).

But these products are not just about stock markets – almost all majorfinancial markets are covered. For example, private investors have themajor currency markets available to trade (e.g. GBP/USD, EUR/USD);precious metals (e.g. Gold, Silver); interest rate futures (e.g. UK Gilts, UST Bonds), commodities (e.g. Crude Oil, Coffee).

David Jones is Chief Market Analyst at CMC Markets, which runs regu-lar free courses explaining CFDs and Spread Betting. For further infor-mation visit www.cmcmarkets.co.uk

HOW MARGIN WORKSCFDs and spread betting are leveraged products – they trade on margin. The easiest way to explain how this works is via an example. If a client bought1,000 Vodafone CFDs at 150p the overall position is worth £1,500 (1,000 shares x 150p purchase price). But only a smaller portion of this amount willbe tied up in your account. If we assume Vodafone has an initial margin requirement of 3 per cent then only £45 will be allocated against this trade. The£45 initial margin requirement is controlling the £1,500 position. Margin is, of course, a double edged sword. It offers the opportunity to make betterreturns on your capital, which of course gives the risk of losses bigger than your initial deposit – you could lose more. But, used sensibly, many tradersfind this another reason for the appeal of CFDs and spread betting.

The CFD SpecialistsPlease be aware that CFDs and Derivatives are leveraged instruments that can magnify your profits substantially but can also result in losses that exceed your initial deposit, therefore they are generallyconsidered to be suitable only for the more experienced investor. If in any doubt please seek further advice. Past performance is not necessarily a guide to future performance. Blue Index Ltd is authorised andregulated bu the Financial Services Authority and is registered in England 4197846 at 23-26 St Dunstan’s Hill, London, EC3R 8HN

�

�

�

�

�

�

�

Advisory and execution only tradingFree level II dataLive daily CFD research and analysisTrading strategy developmentRound the clock supportRegular City seminars and workshopsOld fashioned personal service

�

�

�

�

�

�

�

Advisory and execution only tradingFree level II dataLive daily CFD research and analysisTrading strategy developmentRound the clock supportRegular City seminars and workshopsOld fashioned personal service

TTTeeellleeppphhhooonnneee +++4444 (000)22200 777333999888 666777444555EEmmaaaiiill iiinnnfffooo@@@bbbllluuueeeiiinnndddeeexxx...cccooo...uuukkk

CCCaaalllll uuusss nnnooowww ooonnn 00022000777 333999888 666777444555 tttooo rrreeeqqquuueeesssttt yyyooouuurrr fffrrreeeeee ggguuuiiidddeee tttooo CCCFFFDDD tttrrraaaddiiinnngg

If you are looking for a broker to help you invest and trade in equity andderivative markets, whether in the UK or across all major global markets,then look no further than Blue Index.

Blue Index is the specialist CFD Broker . Based in the heart of the City weare dedicated to providing a professional phone trading service and wel las industry leading online CFD trading. We provide our customers withdaily live research and trade ideas by some of the UK's top market analystsas well as access to experienced traders for updates, advice and support.

Spread betting factsThe rise of the internet and onlinetrading platforms has led to rapidgrowth over recent years. Today itis estimated that there are over100,000 individuals using finan-cial spread betting in the UK, andup to 400,000 may have opened aspread betting account.

A study by the London-basedCass Business School in 2006 pre-

dicted that the number of spreadbetting accounts in the UK couldreach 1 million by 2011, althoughnot all of these would be active.

Spread betting historyFirst launched in the 1975, spreadbetting initially offered a way forindividuals to gain exposure to theperformance of gold, which washard for speculators to access (gold

then soared from US$100 to morethan US$800. Throughout the 1970sand 80s spread betting remained thepreserve of professionals workingwithin the City who understood howit worked. Without the advantagesof the internet prices they werequoted by phone, transactions tookplace the same way, and there wasvery little transparency in the mar-ket. Business expanded rapidly inthe 1980s and 1990s with the intro-duction of foreign exchange deal-ing, contracts for differences (CFDs)and sports spread betting. In 1983

City Index was founded as a finan-cial spread betting specialist, and in1985 sports spread betting wasoffered by Ladbrokes and others. In1997 a London punter made £5 mil-lion with a bet on the sterling-francforeign exchange rate. In 2002spread betting hit the headlineswhen the Financial ServicesAuthority names investor PaulDavidson and City Index brokerAshley Tatham in an insider-dealingcase involving a spread bet on a sin-gle stock. They are cleared fouryears later by a tribunal.

Soareyougoingtobuyshares,

wait a while,thinkofselling,

sittight,waitsome more,

worry,makea cupoftea,

sellshares,paystampduty

andthen paytax?*

Orspread bet?

Let’s face it – it’s one of the simplest ways to make money from shares. As you buy a stake not owna share, your capital's not tied up and there’s a lot less paperwork.Your outlay can be minimal.And best of all, whatever you make is free from UK Capital Gains Tax and Stamp Duty**. In fact, thetime you spend buying shares might be better spent with our free Guide to Spread Betting. Callnow for your copy.

Of course, spread betting is not suitable for everyone, as unlike conventional share trading it’s aleveraged product and can result in losses that could quickly exceed your initial outlay, so pleaseensure you are aware of the risks involved.

† †

*Subject to personal tax circumstances. **Tax laws can of course change.† Past performance is not a guarantee of future performance.

0800 072 1107cityindex.co.uk THE NEXT WAY TO TRADE

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES4

AlternativeapproachKeiron Root outlines thespecific attractions of usingspread betting and CFDs forinvestment trading.

So why are increasing numbers ofinvestors adopting new forms of alter-native trading, such as CFDs andspread betting? Philip Adler, head ofthe CFD department at GNI Touch,argues that “There are three basic rea-sons why you would trade CFDs –leverage, the ability to go short and thestamp duty exemption. The root ofpeople’s motivation is one, or more, ofthese three. Having said that, I can saythat more of our clients make moneymore consistently than they did and amuch higher percentage make moneytrading through us than would be thecase trading through a more conven-tional method.”

Undoubtedly, a key attraction ofthese forms of trading is a degree oftax efficiency. Unlike conventionalshare trading, both forms of tradingare exempt from UK Stamp Duty,charged at 0.5 per cent on direct equitypurchases. In addition, spread bettinghas the attraction that, as they areregarded as bets, trades carried out inthis way are currently exempt fromCapital Gains Tax.

There is also the question of thewider range of investments that theseproducts make available to privateinvestors. Philip Northey, a director ofBarclays Stockbrokers, observes that“We have seen a growing level ofsophistication amongst our clientbase and the retail trading market as awhole. There has been an increasingclient demand for instruments whichprovide access to multiple asset class-es as well as capitalise on market upsand downs, moving beyond just equi-ty trading.”

However, Philip Adler points outthat CFDs are very much a product forshort term trading strategies. “Theshort term product costs are commis-sion, when you trade, and overnightfinancing. You pay for each night youhold an open position. So if you holdit open for too long, you will giveback all you gained from the stampduty exemption. However, if you daytrade, there are no overnight financ-ing costs, so you genuinely save all ofthe costs of your stamp duty.”

Greg sacker, of platform providerKnowledge in Action, suggests that“the big growth has been in spreadbetting. Most people starting tradingthese days with less than £10,000 willopen a spread betting account asleverage is about ten times what youwould get with a traditional share-dealing account. In addition, youhave the cost and tax advantages, andsome companies will let you starttrading with as little as £250, whichmakes it an even more attractiveplace to start. That is why there hasbeen such a growth in spread betting,because of the low entry point.”

How to get startedTom Hougaard outlines the basic types trading accountavailable to investors who want to start spread betting.The gold trading pit in New York isthe closest resemblance to a man-made volcano. It buzzes with energyand the floor is shaking underneathyou. Every now and then it eruptsinto a frenzy of chaos and mayhem,only to settle down again, as if noth-ing had happened.

I was on the floor talking to anothertrader about execution of trades.Inevitably, we started talking aboutfinancial spread betting in the UK.They don’t have that “over there” orindeed anywhere else in the world.What surprised this trader the mostwas the fact that the price our clientsin London could trade gold at waspretty much the same price that hewould trade in the pit. On top of thatthe UK client didn’t pay commission,nor tax on any profits.

What was most fascinating in thiscontext was that the UK resident trad-ing gold through City Index was ableto trade in a size that suited him or her,while in the pit in New York you haveto trade the exchange set contractsizes, which in this case was US$50per US$1 move in the gold market.

It means that you can trade virtual-ly any market in a size that you deter-mine. It also means that if you arebrand new to trading, and can’t affordthe standard contract sizes, you canstill trade the real market using finan-cial spread betting. And you can tradeit in your own currency, BritishPounds, even when you are tradingforeign instruments.

Getting started is the easiest thingin the world. Many companies regu-larly hold open evenings where youcan learn and ask questions. Forexample, City Index posts its semi-nars on www.cityindex.co.uk.

You don’t have to deposit anymoney on your account to view thetrading platform, although, obvious-ly, you need money on the account tostart trading. It is also clearly a goodidea to get used to how spread bettingworks before you risk any actual cash.So most providers will allow newtraders to simulate trades before theyactually start trading. For example, ifyou wish to “paper trade” you cansign up for a demo account beforeyou start for real. A demo account isnot quite the real thing but closeenough to give you a taste of what areal account will be like.

City Index offers two kinds ofaccounts, a limited risk account andthe standard account. A limited riskaccount is a perfect starting place forthe beginner. Trading can be riskyand with financial spread betting youmay lose more money than you actu-ally put into the account. However,with a limited risk account you willnever be able to lose more moneythan you deposit on your account.The flip side is that you will not haveaccess to as many markets as thestandard account. Happy trading!

Tom Hougaard is Chief MarketStrategist at City Index

What it is all aboutDavid Jones sets out the ground rules for how spreadbetting and CFDs operate.

For individuals who have bought andsold shares in the past it is not a quan-tum leap to understand how spreadbetting works. However, although it isimportant that investors understandthe risks involved before they startspread betting, they should realise thatit is not just the exclusive preserve ofhigh-flying city professionals.

The mechanics of spread bettingSpread betting companies will quotea price based on an underlying finan-cial instrument, which updates in realtime as the market changes in price.For example, the Vodafone spread betmay be quoted as 149.75/150. Thismeans if you want to sell then theprice is 149.75 – if you are a buyeryou will pay 150.

Let us assume our investor thinksthat Vodafone will rise, so buys at150. The main difference betweenspread betting and other forms oftrading is that you do not deal in somany shares or contracts, but in“pounds per point”. If our trader buysthe above Vodafone spread bet at, forexample, £5 per point, every penny(point) it moves in his favour is £5profit and every penny it movesagainst him represents a £5 loss.

Because this is a margined product,our trader only needs to initially pro-

vide a small margin deposit to coverthe trade. The true value of the posi-tion is £750 (£5 per point x 150 entrypoint) but, if we assume the initialmargin for Vodafone is 3 per centthen the initial margin requirement inthis case would be £22.50 (£750 x 3per cent)

Let us then assume a week later theVodafone spread bet quote is now155/155.25. The price of Vodafonehas risen, so, of course, the spread betprice has as well. Our trader nowdecides to take profits, selling £5 perpoint at 155. His net profit is £25, dueto a five-point move in his favour(155 exit price – 150 buy price), lessany financing costs that may beincurred, due to this being a marginedproduct.

Of course, based on this example, ifthe price of Vodafone had fallen youwould have lost money, and it isimportant to understand that due tothe fact these are margined products,the amount lost could exceed yourinitial deposit.

The mechanics of spread bettingare as straightforward as that. If youthink a market (share; currency; com-modity etc) is going to rise in priceyou buy first hoping to sell higherlater – and vice versa if you think amarket is going to drop. The trade can

be closed out whenever suits the indi-vidual, assuming the market is open –trades can last from seconds tomonths depending on the strategy ofthe client.

What about CFDsCFDs are Contracts for Difference,which means that they reflect the dif-ference between the price of an under-lying investment at different points intime. They enable investors and tradersto gain exposure to the economic per-formance of individual equities, with-out having to invest in the physicalshare. So, depending on your view of acompany’s share price, you can buy(‘go long’) or sell, (‘go short’), whichenables the investor to benefit fromfalling as well as rising share prices.

CFDs provide the ability to go shortin anticipation of buying back at alower level, after a price fall. Short posi-tions are also margined, as with longpositions, but in this case investorsreceive funding interest on the value ofthe open position, as they are effective-ly lending out the sale proceeds

Another key attraction for someinvestors is that, apart from anyshareholder privileges attaching tothe direct ownership of particularshares, a CFD reflects all corporateactions affecting the underlyingshare. So, for example, the net divi-dend is paid to the holder of a longCFD on the ex dividend date, whileholders of short CFDs pay 100 percent of the gross dividend.

David Jones is Chief Market Analystat CMC Markets. For further infor-

mation visit www.cmcmarkets.co.uk.

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES 5

Look deeperKym Watson of EzeeTrader considers theimportance of investor psychology and traderdiscipline.

This should probably be titled ‘how to make money and how to keepit’, as it’s more likely that only those who have become aware of theimportance of psychology in trading will be reading this now.

So what is it that draws people into investing? The money? Thethought of sitting in front of a bank of monitors with the phone intheir hand shouting orders of buy and sell to their broker? Thereare some theories that it is not necessarily financial freedom thatdraws people in, but the freedom to make decisions, even if itmeans that they regularly have to add money to their tradingaccount. In this day of electronic platforms there is even more free-dom as you do not even have to call your trade through anyone.

Getting an edgeAs a seasoned trader, it never fails to amaze me or even entice meinto arguments over what are ‘better’ approaches to investment –moving averages or Bollinger bands; value investing or growthinvesting? Hey, it does not matter, in the wrong hands they couldall result in a loss of money. In fact, if you see two differenttraders enter a position at the same time, they will almost cer-tainly finish with two different outcomes. Fear and greed willraise their head at this point. Even if the two traders have bothhad the same training, they might ignore the given rules due totheir own psychological persuasion.

experiencedHow

are you?

Selftrade is a trading name of Talos Securities Ltd, which is authorised and regulated by the Financial Services Authority (FSA No. 208271) and is a member of the London Stock Exchange. Registered address: Selftrade, Boatman’s House, 2 Selsdon Way, London E14 9LA. Selftrade CFDs and Selftrade Spread Betting are trading names of City Index Limited (City Index), which is a provider of CFD trading and financial spread betting. City Index’s head and registered office is Moorgate Hall, 155 Moorgate, London EC2M 6XB. For the purposes of CFD trading and financial spread betting, any contract is between you and City Index. All dealing, administration and settlement is carried out by City Index and Selftrade is not responsible for any of the functions performed by City Index. Your account is held with City Index, which is authorised and regulated by the Financial Services Authority (FSA No. 113942).

If you’re an experienced trader you may be ready to up the stakes. Play the markets up and down in a CFD or spread betting account with us.

Important InformationCFD trading and spread betting are margined products, which afford substantial leverage and involve a high level of risk to your capital. You can quickly lose more money than your initial deposit and you may be required to make further deposits at short notice. CFD trading and spread betting are not suitable for everyone. Please ensure you understand the risks. If you have any doubts, please consult a suitably qualifiedindependent expert.

Visit cfds-sb.selftrade.co.ukor call 0845 356 0160 Lines are open Monday to Friday 7.30am - 8pm. Calls may be recorded.

AdvantageKnowing the probability of an outcome for a particular strategyshould provide traders with an advantage. However, we haveproven that, even then, the individual’s psychological leaningswill result in some letting a trade go by. Others, after a couple ofwinning trades, increase their stake disproportionately to theircapital and others reducing the stake after a single loss. Forthose with the bid for freedom, the key to successful tradinglies more within you than any strategy. I say this because dis-cipline is the key to becoming successful and overcominginternal struggles. You must have a set of rules wrappedaround your favoured strategy that can be back tested andused rigidly in the future.

Money managementI can never stress it enough, but money management and positionmanagement are absolutely essential to long term success. For thosethat just want the thrill of the trade, there is the casino; for those thatare looking for the financial gains and maybe eventually financialfreedom, there’s the disciplined approach to the markets.

CFDs’ historyWhen CFDs originated in the late 1980s, they gave UKinvestors the returns of equities without two major down-sides. As well as not carrying UK stamp duty, they were notsubject to the disclosure rules that force investors to saywhen they are holding large positions in UK stocks.

One controversial episode in CFDs’ early history was theiruse by Brian Keelan, the legendary SBC banker, to help hisclient Trafalgar House profit on its bid for Northern Electricin 1995 regardless of whether it succeeded. When the secretCFDs later became public, there was uproar.

In early 2006 the Takeover Panel introduced a rule thatinvestors should disclose CFDs over stock positions of 3 percent or more of a company’s equity as soon as it entered a bidsituation to help improve transparency in the CFDs market.Some groups are now lobbying for further disclosurerequirements to prevent traders from building up large posi-tions in a stock that are not visible to the rest of the market.

The attractions of CFDsInvestors can use CFDs in a variety of ways, including

• Hedging - CFDs enable investors to ‘sell’ equities, forexample, so that they can protect equity portfolios againstfalling share values;

• Short selling - CFDs can be traded long or short, givinginvestors the opportunity to make money when shareprices are falling as well as when they are rising;

• To reduce trading costs for active traders- CFDs do notincur UK stamp duty

• Cash extraction - CFDs can be used to gain market expo-sure with out tying-up capital resources

• Leverage - CFDs are geared investments, enablinginvestors to increase the percentage return (or loss) ontheir initial investment

Source : TD Waterhouse

Try before you buyDavid Jones at CMC Markets, points out that:

Many spread betting and CFD companies provide demon-stration accounts that can be downloaded from the web. Thisenables potential clients to try out the trading platform, trackmarkets, place trades etc without actually risking any moneyand again helps to give a feel for the mechanics of CFDs andspread betting. Probably the best way of learning about thespecifics of these products is to go along to one or more of thecompanies themselves as they do provide a wide range of edu-cational courses.

SeminarsMost spread betting and CFD companies run introductoryseminars on how the products work, explaining the risk andrewards and the opportunity to see trades being placed inreal time on real markets. At CMC Markets for example, werun at least four of these free introductory seminars permonth both at our London office and across the UK. In addi-tion, “live trading days” are held where non clients andclients can come along to have these products explained tothem and also have the opportunity to place trades via ourMarketmaker trading platform, on a live account but withoutactually risking their own money. This hands-on approachalways proves popular and gives attendees a real under-standing of how this form of trading actually works. www.cmcmarkets.co.uk/seminars

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES6

Balancethe factsEzeeTrader’s Kevin Burtonconsiders the relative risksand rewards of financialspread betting.The obvious tax advantage of financialspread-betting has drawn in a hugenumber of new traders in the past fewyears. The lure of trading stocks, curren-cies and other commodities for tax-freeprofits has appealed to even the mostcautious investor. The added advantageof using leverage means potential prof-its can be amplified significantly in avery short space of time. A 5 per centmove in share price can give a spread-better many times that return.

The ability to make money in risingor falling markets with no commissionsto pay, plus the current tax advantageappear to be a recipe for success.Traders picture themselves making fatreturns so they can sit back at the end ofthe week and enjoy an equally fat cigar.However, this is certainly not a one way

street. As we know, the use of leveragecan exaggerate returns, but for those notfamiliar with it, it can just as easily exag-gerate losses. Then there are the zerocommissions. Obviously, the brokeragefirms have to make their money some-where and much of this is captured in thelarger spreads than you would normallyexpect by trading shares or CFDs.

And you should also remember: bothproducts make use of leverage and thiswill have the effect of magnifying theeffects of your trades. This is why manyproviders suggest that their clients,particularly new clients, use stop lossesto protect against potentially largefalls. These are mechanisms whichallow the investor to set a price which,if breached, will trigger an automatictrade, thus closing your position.

If you have good trading discipline(use of correct money managementprinciples and trade management),then spread-betting can offer an excit-ing and rewarding way to play thefinancial markets. Many traders startout spread-betting and then move onto CFDs when they need tighter spreadsfor intra-day trading. It certainly hasits place and traders looking for lever-age with only a small amount of initialcapital will find what they have beenlooking for here. Just remember, like apacket of cigars, spread betting carriesrisks if improperly used too.

Your flexible friendSimon Smith examines the role of the broker in enabling investors to take advan-tage of alternative trading strategies.

The changes in technology haveled to an explosion of firms offer-ing accounts to private individualswho wish to take part in trading. Intoday’s world, you can open aspread betting account for a fewhundred pounds. Competition isfierce between firms who want tobe the private trader’s broker. Any-one, with the disposition, can setup as a trader in their bedroom.

A changing worldSimply put, the role of the broker isto put the private trader in touchwith the market. The traditionaldefinition of a broker is that of anintermediary who brings buyersand sellers together. In the contextof spread betting and CFDs, a feefor each trade is either minimal ornon-existent, due to efficiencywhich comes from competition.

So what is in it for the broker?The answer is the bid-ask spread.

The spread is the difference betweenthe price the broker will buy at and theprice the broker will sell at. MarketMicrostructure attempts to explainwhy this spread exists and whataffects the size of it. The theory putsforward market size, the proportion oflarge to small trades and asymmetricinformation as characterisations.

Looking beyond costsOn a business level, it is obvious thatthe spread exists as the brokers “cut”.For the trader, from the cost side ofthe equation, you should seek to finda broker which has no or very lowfees and tight (small) spreads. Anoth-er cost includes slippage, the differ-ence between where you ask for yourposition to be exited from the marketif you are wrong and where your bro-ker actually exits you. This is not soobvious a cost, but is a cost all thesame and varies from one platform toanother. Also, find information on

how a particular platform determinesif you should indeed have your posi-tion closed.

Costs are by no means the only con-siderations, however, because brokersoffer many benefits and add-ons. Thebasic trading platforms can differgreatly from one broker to the next.Most, if not all, offer software whichcan be downloaded from the internet toa PC, others offer slightly more flexiblebrowser-based platforms which mayonly require Java. These will enableyou to trade any number of financialspread betting or CFD products. How-ever, if you do not want to be tied to adesktop computer or laptop, you mayhave to consider those brokers whooffer trading over mobile phones andPDAs. Watch out for add-on researchtools, such as charting packages fortechnical analysis, market commen-tary, sentiment and news packages forfundamental analysis, these add-onscan save expenses elsewhere.

You’ve probably heard about the advantages of spread betting – a huge range of markets; instant dealing; no income orcapital gains tax;* and the ability to make gains when the market falls – are among them. But maybe the unfamiliarity,and frankly the risks, have put you off. It’s for you that we devised the Finspreads Trading Academy. A comprehensivestep by step guide to get you started in spread betting.

In eight easy to understand stages, the Academy covers the entire subject from absolute novice to advanced day trader. It letsyou trade on our professional platform for just a penny a point for an introductory period.** There are comprehensive tradingexamples, FAQs from people like you, and optional seminars and online webinars to give further support.

Of course, it’s important to fully understand the risks involved. Remember that spread betting is not suitable for everyone, as unlikeconventional share trading it’s a leveraged product and can result in losses that could quickly exceed your initial outlay.

But thousands of investors have started spread betting with the Finspreads Trading Academy. You can open an accountwith just £100. So why not log on to finspreads.com/learn and find out more.

Getstarted.

Spreadbetting:don’t getstartled.

*Tax laws may change.**£3 minimum stake on FTSE ex 350 shares.

The Finspreads Trading AcademyCall 08000 96 96 20 or visit finspreads.com/learn

Controlling the risksTom Hougaard looks at ways of developing sound risk management strategies.

I was once in the company of MarkDouglas, the author of Trading in theZone and The Disciplined Trader.Mark is one of those rare individualswho can distil years of experienceinto a few lines of wisdom. I askedhim why many traders don’t use stoplosses. His reply came as snappy asmy question: because they don’t wantto be proven wrong.

There you have it. In one sentence.The reason for the demise of manywell intended efforts by intelligent

people of all ages to trade successful-ly. It is all psychological. We don’twant to hurt our frail egos by provingourselves wrong. However, risk man-agement is so much more than plac-ing a simple stop loss on your tradingposition. Indeed it involves placing ofStop and Reverse orders, profit targetsas well as limit orders.

Types of protectionThe City Index platform allows thetrader to place simple stop losses. It

also has a feature whereby you caninput profit taking targets onto theorder system. As is the case with mostsystems, you decide whether youwant these to be good-for-the-day orgood-till-cancelled.

One feature which I believe willbecome standard in the tradingindustry before long is the trailingstop-loss order. As the name suggestit trails the market by a measure spec-ified by you. It allows you to lock inparts of your profits or narrow your

potential loss as the market moves inthe direction you anticipated.

The OCO optionOne particular trading strategy that Ipersonally employ is the OCO orders,abbreviated from One Cancels theOther. An OCO order, in my mind,comes very handy at a time of therelease of market moving events, suchas the release of economic data dur-ing the trading day. It allows you toplace to orders in a band outside thecurrent traded price. Whichever pricegets hit first will automatically triggerthe other order to cancel.

The strategy is designed to pull youinto a position once the economicdata is released and the marketmoves. You are not trying to antici-

pate which way the market will moveahead of the release. You are simplyletting the market pull you along forthe ride as traders place their ordersinto the market.

The trick is not to place your orderto close to the market price. The othertrick is to place your order as close tothe actual release of the data. Thismeans I will place my orders into thetrading system only seconds beforethe data is released.

Occasionally the market spikes sodramatically in one direction, only toturn around, that you find your orderand your stop-loss gets hit in thesame breath. This resembles the feel-ing of throwing money out of thewindow, but as they say, execution isguaranteed, success is not.

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES 7

Making all theright movesDavid Jones tackles the question of how to devise aprofitable trading strategy.

On the face of it trading does not lookthat difficult. All you have to do is buylow, sell high (or sell high, buy low ifyou are going short) and wait for theprofit to appear. Of course, as anyonewho has ever done any trading orinvesting knows, the reality is some-what different. Like any other busi-ness, some thought should be givenbefore jumping in with both feet andthis is where the trading plan comes in.The first consideration should be how

much money you are going to dedicateto your trading account. Spread bettingaccounts can be opened with a fewhundred pounds and, regardless of howmuch money you decide to fund youraccount with, sensible advice would beto keep the trades small in size initiallyuntil you find your strategy is success-ful and you get a feel for the marketsyou are interested in.

This risk side of trading is of para-mount importance. Even the best trad-ing systems will go through losingperiods – let us say a string of five ormore trades that end up being losers. Ifyou are risking losing, for example, 30per cent of your account balance onany one trade, it does not take a math-ematical genius to figure out that youare a fugitive from the law of averages.Eventually this relaxed attitude to riskconsideration will catch up with you(probably sooner rather than later) andremind you exactly why more thoughtshould be given to it.

It is sensible to treat trading as amarathon not a sprint. Take the viewthat you want to be involved in mar-kets over many years rather than try-ing to treble your account in onemonth. An account with small posi-tions that racks up a 2 per cent returnevery month is still going to outper-form the vast majority of professionalmoney managers over a year.

Probably one of the biggest mis-takes made by new traders is aimingfor too high a return right from thestart, which, of course, means takingon a correspondingly higher level ofrisk, too often with disastrous results.No one losing trade should do too

much damage to your account, sogive a lot of thought at the start as tohow big your trades are going to be.

The next point to consider is whatsort of markets you want to be involvedin. CFDs and spread betting allow youto trade thousands of financial instru-ments – individual shares, stock marketsectors and indices, currencies, com-modities and bonds. Following all ofthese is a full-time job on its own,which is why most private investorstend to specialise in one area. Whichmarkets is of course entirely down tothe individual – but most tend to stickinitially to markets they are alreadyfamiliar with. For example, a privateinvestor who has been active in thestock market may initially contain theirfocus to the various individual sharesavailable via CFDs and spread betting.

Consider your time horizonThen there is the time frame of thepotential trade to consider. It is a mis-conception that CFD and spread bet-ting clients spend their time glued tothe screen day in and out, manicallyclicking buy and sell and jumping inand out of markets in seconds. Whilethere certainly are clients who tradethat way, there is no reason why thesesort of products cannot be used foropportunities that run for weeks ormonths. With orders such as stop loss-es available free of charge, there is noreason why traders need to be stuck tothe markets around the clock if look-ing at medium to longer term moves.

David Jones is Chief Market Analystat CMC Markets. For further infor-mation visit www.cmcmarkets.co.uk

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES10

Spreading your wingsCase study: Keiron Root meets a trader who has experienced the advantages ofadopting a spread betting strategy.

Simon Goldstein is a private investorwho has followed a natural progres-sion from traditional share trading tousing Spread Betting and CFDs moreactively. He explains that “I havebeen a member of Barclays FrequentTraders club for about three and ahalf years, and they have been excel-lent for that type of investing. Thecheapest in the market, at £7.99 pertrade and their spreads are very tight.I should also say that, on the rare

occasions that I have experiencedproblems, the support team has beenvery helpful.”

However, he explains that “I waslooking to spread trading because itlooked to me that, for short termpositions and day trading, it wasmuch quicker and cheaper. Whatreally kills frequent trading with tra-ditional share dealing is the Govern-ment’s half per cent tax. Also thecosts of trading are extremely low

and you can short your position aswell. It is difficult to run a shortposition with actual shares as thisinvolves borrowing stock.”

Wider horizonsGoldstein uses a specific example toshow how spread betting helps histrading strategy “I was interested inbuying Cable when it got over 2 andI looked into doing that with actuals,via an offshore dealing account I

PROFESSIONAL TRADERPLATFORMBarclays Stockbrokers Professional Trader Platform offers

• Integrated CFD and share trading(including ISAs, PEPs and SIPPs) in asingle platform• Comprehensive trader tools – level 2data, streaming charts, Dow Jones news • Fully customisable workspace tomove seamlessly between unlimitedcharts and tools throughout the platform• Superior navigation features includ-ing right-click menu functionality• The same competitive commission rates as Barclays Stockbrokers standard service – for example just £7.50 for onlineshare trades when dealing more than10 times in a quarter

Philip Northey, a director of BarclaysStockbrokers, feels that “what is greatabout our Financial Spread Trading product, is that, as well providinginstruments which provide access to multiple asset classes, our clients nowhave access to a tax efficient productin which they can leverage theirassets. Of course, with this potentialfor high reward comes at a higherrisk. That is why we have introduced alimited risk Financial Spread Tradingaccount. Our clients can achieve thetax benefit and gearing associatedwith spread betting without concernover margin calls.”

have in sterling. That would be avery clumsy way of doing it. Itwould have meant converting myinvestment into dollars and wouldhave left me with a pot of dollars sit-ting in the account.”

But he points out that “I am notparticularly interested in dealing inoverseas markets and I haven’t gotthe time to follow them. If youhaven’t got the time or the interest insomething, then you shouldn’tinvest in it. But if you want to take aposition in, say, the Dow, it would bedifficult to do that outside of aspread betting account.”

Goldstein’s experience has beenthat “With a spread betting approachyou have dealing that is easy andcheap. It is clearly designed for peo-ple who trade often. It is very cheapand the spreads are very tight.”

Stop loss protectionAnd there is a degree of risk protec-tion as well. He points out that“Barclays operate guaranteed stoplosses, which is a very good markettool for a private investor. Youhaven’t got time to watch the mar-ket and constantly move in and out.But with a guaranteed stop loss,whilst you are paying a small pre-mium for that, it is worth it. Forinstance, with Cable, your guaran-teed downside is ½ cent but yourpotential upside is unlimited. Andonce the team at Barclays knowthat you know what you are doing ,you can negotiate a wider stop loss,say a cent or 1½ cents.”

Managing your expectations

Keiron Root asks one online broker aboutthe key elements of a trading system

In an increasinglycompetitive mar-ket place, the costof dealing is a keyconsiderat ion.

Salim Sebbata (above), Director ofRetail at E*Trade, which has recentlylaunched an improved version of itsE*Trade Professional service for CFDdealing, points out that “Pricing is crit-ical so we have two pricing points. Wehave a quote driven service, at £9.95per trade and a direct market accessdriven model from five basis points. Anew feature is the floating trade ticket,where everything is customised.”

He adds “We have just launched asecond version of E*Trade Profession-al with improved charting .On thesame platform, you can trade 11 dif-ferent markets with this system, so forexample, if you have a view on Japan,you can get exposure to it and weoffer leveraged FX and Futures deal-ing as well.”

Flexibility & ReliabilityE*Trade’s Sebbata emphasis that, whatinvestors want from a trading plat-form is primarily flexibility and relia-bility, and in addition E*Trade pro-

vides transparency to customers. Headds that “A key question is whetheryou want a quote driven system ordirect market access E*Trade Profes-sional gives you the option of both.Flexibility is very important, as is therobustness of the trading platform. Itis of key importance that it doesn’t godown. Also, traders want transparen-cy, they don’t want to see requotes –they don’t want to see a quote andthen get a different one when theydeal, so we religiously follow thiswhen executing the order. What thecustomer commits to, they get, thereare no hidden extras or unwantedchanges to the transaction there iscomplete transparency across theplatform. That is why there is a rapidlygrowing number of loyal users whorealise that E*TRADE provides theprofessional service that they need.”

Supporting the InvestorAnother key basic requirement is thefacility for new investors to learn howto trade before they start doing it forreal. Sebbata points out that “E*TradeProfessional has a demonstrationfacility where you can simulate real-life trading with a notional £100,000.

A third important consideration is thelevel of support available forinvestors, particularly those usingalternative trading techniques for thefirst time. Sebbata points out that“Another key feature of our offering isa relationship management team whowill give support online or over thephone. Clients can even come into theoffice to meet with them to discusstheir needs face to face.”

He also stresses the importance ofcontinuing to develop a trading serv-ice. “The important thing is not just tohave a product out on day one. Youhave to keep improving and develop-ing the system. We try to have one ofthe narrowest spreads and we try toinnovate the offer constantly. Being atechnology-driven growth company,this is nothing new for us.”

The Spread betting AlternativeThe E*TRADE Spread Betting plat-form gives clients access to spreadbetting facilities. Salim Sebbata feelsthat “with spread betting, people arelooking for a sophisticated tradingplatform. It is driven by the taxadvantages, so our clients are mainlylooking for quick execution and avery narrow spread. What we haveseen from our experience is thatclients have got used to trading CFDsand want to approach spread bettingin the same way.”

He concludes “People want to taketheir basic experience of spread bet-ting and trade as they would withCFDs, so they want news and robustcharting applications. These are allcritical and this is what we provide,and we enable your deal from onepoint at a great spread!”

Editor’s ExclusiveE*TRADE hits latest SALVO with INDUSTRY TIGHT SPREADS

TIGHT NEW SPREADS with E*TRADE Spreadbetting.

Tight spreads, in-depth analysis, top quality data plus the E*TRADEuser friendly platform always adds dynamism and dimensions toones spread betting trades.However this week E*TRADE announced that they have gone onestep further and have reduced the spreads on a wide range of mar-kets including FTSE shares, oil and global indices (FTSE, Wall Street,Dax, and many more). See below for example:

*FTSE 1 Point spread applies within market hours (4 points out of hours) throughoutFebruary, may be extended.

E*TRADE FTSE Daily Rolling spread of 1 point, is currently highlycompetitive within the market place matching their keen pricingrange that they offer on their FX spreads which is also relatively tight.

Salim Sebbata UK Retail Director said: “We are proud to state thatwe currently offer amongst the very best value in the market forSpreadbetting. With live streaming charts, real time valuation andquick fill (entry and exit) we have made E*TRADE Spread Betting abetter package for our customers. Our motto to our clients ‘PowerTrade the markets with ease, speed and value’ is holding true”.

To apply for an account go to www.etradespreadbetting.com

New Rates Previous RatesFTSE 100 Rolling Daily 1 point* 3 pointsBrent Crude Oil 5 cents 6 centsDaily Rolling S&P 4 pips 5 pipsRolling Gold 0.6 0.7Currency - £ GBP / $ USD 3 3Currency - € EUR / $ USD 2 2Currency - $ USD / ¥ JPY 2 2

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES 11

Upping the stakesSimon Smith sets out some ground rules for aspiring traders

So you wake up one day and decideyou want to trade. Where does thebeginner start? The most prudentway forward is to get a pen and paperand mark down pretend trades – thisis known as paper trading. All of theinformation needed to do this is wide-ly available. The internet is such arich resource for informing us wherefinancial markets are trading at anygiven time.

Practice firstAlways define where you are enteringthe market to create a position, whereyou would like to take your profit ifthe market moves in your favour andwhere you would want to exit themarket if you are proved to be incor-

rect. Paper trading gives beginners anappreciation of what is involved inand what methods are needed to besuccessful, without the unwantedstress of losing any money. Exten-sions of paper trading are the demotrading accounts that most brokersnow offer free of charge. These havethe added advantage of familiarisa-tion with particular trading platforms,as well as, the particular characteris-tics of individual markets.

Start slowlyOnce paper and demo trading is mas-tered, a minimal amount of moneycan be risked. Generally, for spreadbetting accounts, most markets canbe traded for £1 per point. This means

the beginner can trade tiny amountsat a time. Due to differences in theNotional Trading Requirement (NTR -the minimum amount needed in anaccount to take a position, typically

between £75-300), depending on theparticular individual market, it isprobably worth opening an account aminimum balance in the region of£500-£1,000. Some firms require aminimum opening deposit of £250;

TARGETING AN AVERAGEAn effective technique to use when trading with £2 per point or more is averaging into a particular market. For example, if itis believed that the USDJPY is going to increase from 120.00 to 121.00, buy at £1 per point at 120.00, if the market goes downto 119.70, buy another £1 per point contract at 119.70, hence averaging into the market at 119.85 for £2 per point, the resultin monetary terms is a £30 advantage. Remember that the risk management rule of 5 per cent still applies. This should meanthere will not be a dramatic drawdown to capital within an account.So in this specific illustration, the maximum stop would have to be placed at 119.35 (assuming no slippage) which would rep-resent £100 loss (5 per cent of the £2,000 account size). The profit potential, however, would be £230 if the 121.00 tradingobjective is reached.

others have a minimum deposit of£1,000.

Whatever the opening balance,good risk management suggests thata maximum of 5 per cent of capitalshould be staked on each trade. Theoverriding maxim is, only risk moneyyou can afford to lose. Aim to doubleyour account from £1,000 to £2,000slowly trading £1 per point, beingsure not to overtrade in the process.Achieving this will increase confi-dence and add to preparations forincreasing your position size to £2 perpoint. Again, once you have reached£3,000, you can increase the positionto £3 per point and so on.

Avoid speculationBeing involved in the buying andselling within the market can be quiterewarding and fun, but never getcaught up in speculative mania andbubbles such as the infamous exam-ples that gripped the Dutch in the sev-enteenth century with tulip bulbs andthe British in the eighteenth centurywith the South Sea Bubble. Bothexamples are characterised by themarket trading much higher than theinherent value warranted. Prices weredriven higher still by many individu-als believing other individuals wouldbe even more foolish by paying aneven greater price. These bubblesexisted only until the hype was over,suddenly nobody was available tobuy, and the bubbles burst. This led tofinancial meltdown for most partici-pants. Therefore, avoid fads; try tofollow solid and sustainable methodsfor generating trading ideas.

A question oftimingAlpesh Patel (right) looksat techniques for choosingthe right time to go long or short.

In the coming months innumerabletraders, from the novice to the experi-enced, the young to the old, the netvirgin to the web-savvy, will cometogether online in the pursuit of abelief. Their belief is neither religiousnor cultural nor social, but financial:that you can make money ‘swing’trading online.

Few will have heard of online swingtrading. Others will not have put aname to the form of trading they aspireto. So why do so many want to do it?As a veteran swing trader, the case isso compelling. The fact that manyignore it, or are ignorant of it, is tragic.

Swinging onlineSwing traders typically look for rapidgains from holding a stock for a fewdays or weeks. The swing trader rides,for instance, the recent double digitgains in the space of a few days inBodycote, Sainsbury and Wether-spoon. Swing traders look for stockswith short-term price momentum, notvalue stocks which usually take many

months to rise to greater valuations.Although they may trade the samestocks as longer term investors, it isthe time frame that varies.

Why swing trade then? First andforemost it is the profit motive.Assuming a 40 per cent averageannual return from long term invest-ments is to be achieved, that is a typi-cal solid value stock portfolio over thelong term.

But from swing trading I would bedisappointed with average annualreturns below 60 per cent. Of course,greater returns bring greater risks,and active trading consumes moretime than long term ‘buy and hold’investing.

But then again, if you had boughtMisys last June you would have seena 45 per cent return by September,and then be back to a 0 per cent

return if you held on until October,and another 45 per cent return fromthen until now. The swing trader triesto capture the profit, then run, re-enter and ride it again. The buy andholder tends to ignore shorter termmarket gyrations and can end upmaking 0 per cent in the same stock.

Three phase powerSo what are the techniques for deter-mining when to go long and when togo short – when will the swing, turn?Swing trading essentially has threephases. Phase one ispicking the stockwhich is likely to riseor fall over the comingweeks. Most onlineswing traders will usecharting to signal like-ly rises.

Interpreting two keytechniques are essen-tial: indicators andprice patterns. Amongthe indicators thatoften suggest a priceswing are myfavourite, ‘the MovingAverage ConvergenceDivergence’ (MACD).These depict graphsbased on mathemati-cal formula acting upon the price to antici-pate direction changein the price – or aswing.

Free charts on sitessuch aswww.advfn.com orwww.bigcharts.comprovide these. Educa-

tion can be found onwww.videos.alpeshpatel.com andwww.investopedia.com. Among pricepatterns are ‘breakouts’, where theprice moves out from an area of priceconsolidation and congestion, usual-ly indicating a change in directionand rally.

Alpesh B Patel is a hedge fund man-ager and founder of Agile PartnersAsset Management.

ProfessionaltradingBarclays Stockbrokers’ launchedits Financial Spread Trading serv-ice in November. The service offersinvestors the facility to speculateon the direction of future pricemovements of various underlyingfinancial instruments includingindices, currencies, commodities,equities and their associatedoptions, by indicating the amountthey wish to bet on each pointmovement. Barclays Stockbrokershas launched the service inresponse to research amongst itscustomers which shows that 40per cent are currently using orplan to use a financial spread trad-ing service. Key features include

• Instant execution• Fully interactive online

dealing• Extended trading hours

for specified markets• Guaranteed stop loss

orders• Small minimum stake

sizes, from £3 per point.

The service will shortly be aug-mented by the launch of a Profes-sional Trader Platform, offeringinvestors an integrated suite ofcustomisable, expert-grade finan-cial tools to help traders to predict,analyse and stay one step ahead ofthe market. This service providesfree level two data for investorsthat trade on average more thanseventy five times in a calendarquarter.

“Nobody should ever risk morethan 1 per cent of their total port-folio on a single trade. If it goeswrong, you could lose 20, 30, 40points and the game would quick-ly be up if you did that too often.And a lot of people these days areusing binary betting, which ismuch more like a traditional betwhere you simply bet on some-thing going up or down, but withno way of building a position.”

Greg Secker, Knowledge to Action

“The overriding maximis, only risk money youcan afford to lose “

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES12

Technically speakingAlpesh Patel explains the difference between fundamental and technical analysis.

Online trading was supposed to saveus time, but by providing a deluge ofstock ideas, the internet has replacedthe time wasted hunting for ideaswith time taken sifting through aflood of them. How long it takes topick your stocks is as important as thestocks you pick. After all, if you couldhalve your research time you woulddouble your returns per hour. But howdo you do that without reducing thequality of your picks? Charting ortechnical analysis is the solution mostoverlooked by private investors.

Technical analysisTechnical analysts focus on pricecharts, such as those onwww.bigcharts.com, and ‘indicators’based upon those to generate buy andsell ideas. Technicians examine recentprice history for indications of forth-coming price movements. They arguethat if a certain price pattern in thepast has consistently preceded a pricerise, then the next time that patternoccurs, it will probably lead to a pre-dictable price movement.

Technical analysis has manyattractions over fundamental analysiswhich involves examining companyaccounts related items such as priceearnings ratios, revenue growth andso on. Firstly, technical analysis is agreat time saver. It is far easier to scan100 stocks to see if there are any buy

signals based on an indicator, than tosift through their individual accountsor read their annual reports. Visit theexcellent www.clearstation.com forsignals based on technicals for USstocks and see www.sharescope.co.ukand www.advfn.com for the UK.

Secondly, technical analysis allowsyou to use the web to open global mar-kets. Say you want to use a global bro-ker such as www.internaxx.com to buyFrance Telecom. How do you compareit with British Telecom? A fundamentalanalyst reading company accountswould have to assume similar account-ing procedures in the UK and France.However, a technical analyst has nosuch worries with foreign stocks. Hejust examines the price chart of thestock and technical indicators relatingto it for buy and sell signals.

Which Iindicators are best?Which technical indicators shouldyou consider? I prefer the most popu-lar indicators – MACD, stochasticsand RSI, combined with occasionaluse of Bollinger bands and retrace-ment levels. They have withstood thetest of time, they work and are usedby the technical analysis departmentsof most major investment banks too.

For instance between April and Maylast year the FTSE 100 showed a ‘neg-ative divergence’ warning of an immi-nent fall. The FTSE then plunged from

around 6000 points to 5500 points ina few weeks. Anyone following theindicator would have had an advancewarning, or at least known to recon-sider any major purchases.

Of course technical analysis doesnot work all the time – no method ofstock selection does. Continue pro-tecting your portfolio from losingtrades by setting stop losses andthrough diversification.

Charting seems to work best forshort term trading – completing thetrade within 3 months. Furthermore,you should only consider charting ifit makes sense to you otherwise youare unlikely to abide by the buy andsell signals generated and so liable tolose money.

Fundamental and technical analy-sis are not mutually exclusive and thetwo can be married. Consider narrow-ing your choice of stocks from say100 to 10 using technicals, because itwould take far less time to discardstocks using technicals than funda-mentals. Then use fundamentals onthe 10 remaining stocks to pick thebest 1 or 2. Who said fundamentalistsare difficult to live with?

Alpesh B Patel is a hedge fund man-ager and founder of Agile Partners

Asset Management.

Under the microscopeSimon Smith shows you how to analyse markettrends to improve your trading performance.

No matter what market appeals to anygiven trader, when it comes toanalysing trends, technical analysiscan be used in almost exactly thesame way regardless. The first con-cept most beginners are taught is totrade in the direction of the trend,“Let the trend be your friend” is awidely quoted phrase in the City. Atrend can be downward (a series oflower highs), sideways and upward (aseries of higher lows), money can beextracted out of three directions.Trends can be short-term (a few days),medium-term (a few weeks) and long-term (a month). Hence, one cansimultaneously trade with the long-term trend, but against the short-termtrend. There is no definite right orwrong answer.

How to spot a trendSo how do we determine these trends?

The basic method includes trend-lines (straight lines which touch 3extreme lows or 3 extreme highs)which while intact means the trendalso is intact, but if the line is bro-ken will suggest the trend is revers-ing or at least slowing. Channelsare 2 parallel trendlines whichenvelop the market price action.This works in a similar way to thesingle trendlines.

There are also many technicalindicators mathematically con-structed from the price action, toidentify the underlying trend,including Moving Averages, LinearRegression lines and The Commodi-ty Channel Index. Traders rely onoscillators; amongst the mostfamous of which are the RelativeStrength Index (RSI), Momentumand Stochastics, to warn them thatan established trend maybe coming

to an end. Chart patterns, such as ‘headand shoulders’ and ‘double tops/bot-toms’ are also used indicate marketreversals, others are used to signalcontinuation in the trend.

Integrating fundamentalsSome traders will only analyse trendsin terms of the above technical indi-cators, these are known as ‘purists’,while others will add fundamentals

MOVING AVERAGES

Moving Averages are among the most popular of technical indicators andamongst the easiest to understand and use. They give an overall picture ofwhat is happening with a market or stock. The moving average calculates theaverage (usually closing) price of a market over a certain number of days.Views differ as to how much data it is best to use, but for longer terminvestors the 50 and 200 day moving averages are amongst the most widelywatched. The average ‘moves’ because it is updated at the close to reflect theprevious day’s data.

and market flows into their decisionmaking process. In relation to equi-ties, studying price earning (P/E)ratios to determine whether a particu-lar share is undervalued or overval-ued, adds extra information whichcan be used to determine value.

For FX trading, the PurchasingPower Parity (PPP), Monetaryapproach, Interest Rate Parity, andBalance of Payments can all be usedas fundamental tools to establish thevaluation and possible direction ofexchange rates. Flow analysis of

non-commercial accounts net posi-tions on the International MonetaryMarket (IMM) can indicate the overallmarket sentiment for many financialinstruments.

The most important approach toanalysing trends is the one which hasa positive mathematical expectation,dogma about which is the best way topredict market direction is not sovital. An amalgamation of the meth-ods above, plus others not coveredhere to create an accurate tradingstrategy is the key.

How to use CFDsAn example of using CFD to improve the efficiency of your trading strategy:in October, you decide Vodafone is looking cheap. The stock is quoted at130p – 131p in the market and you buy 20,000 shares as a CFD at 131p, theoffer price. Instead of buying the shares in the conventional way and put-ting up the full value of the trade (£26,200 plus commission of £303.50 andstamp duty of £131), you need only supply a deposit of 5 per cent or £1310,plus commission of 0.5 per cent or £131.

By late July, Vodafone has risen to 141p – 142p and you decide to closeyour long position by selling 20,000 shares at 141p, the bid price. Your profiton the trade is calculated by subtracting the opening level (131p) from theclosing level (141p) and multiplying this by the size of the position. In thiscase, your profit would be 10 p x 20,000 = £2000 less commission. In thisexample a rise of 8.5 per cent in the shares has delivered a 32 per cent returnon your initial deposit, net of commission.

Interest is charged on long positions held overnight, whereas as interest ispaid to clients that hold short positions overnight.

In the above example, interest would be charged at £4.36 per day, basedon a funding rate of LIBOR + 2.5 per cent.

Source : Killik & Co

Learning moreDavid Jones, Chief Market Analyst at CMC Markets, explains that:

Spread betting and Contracts for Difference have enjoyed massive growthamongst private investors over the last few years, and the industry doesrecognise that for investors new to these products, education is a keyrequirement.

When it comes to books on the subject, there are a few but it is importantto understand that spread betting and CFDs are just a way of trading finan-cial markets – they are not a market on their own. So, if a trader or investorhas a successful strategy that he or she is currently using, this should betransferable to spread betting and CFDs.

Ultimately these are based on the underlying financial market and willmove as that moves. For those interested in trading, recommended readingshould include the wide range of books available on trading strategies, man-aging risk and technical analysis.

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES 13

Although many investors will haveonly recently become aware of theattractions of CFDs, they have, in factbeen available to retail investors fora decade. Broker GNI, introduced thefirst retail CFD service in the lateNineties.

Philip Adler, head of the CFDdepartment at GNI Touch, recalls that“I and another colleague joined GNIspecifically to start offering CFDs toboth retail and wholesale investors.This started in early 1998 and theonly other CFD offerings at the timewere aimed at hedge funds. Theywere established as a way of allowinghedge funds to trade more efficiently.Market makers had the ability to goshort and they were passing on thatability to their hedge fund clients.”

He explains that “Because therewas no change of title, there was nostamp duty on these transactions. Wewanted to offer this to the retail andwholesale markets, so we took adviceas to whether this tax advantagewould continue to apply as wemoved further down the food chain,and we were told that it would. We

Staying ahead of the packKeiron Root profiles the one of pioneers of CFD investing in the UK.

knew that the combination of lever-age, the ability to go short and thestamp duty exemption would be avery powerful tool.”

Initially, the CFD offering was runon very similar lines to a traditionalbroking service. Adler recalls that “Ini-tially, we were taking orders just overthe telephone. Our dealers had to findout who the callers were, whether theyhad enough money to cover the trade,that they hadn’t traded elsewherearound the desk that morning and thatwas all very Labour intensive.”

Clearly this was limiting the scopeof the product, so automation becamea priority. Adler continues “in mid-1999, we launched the GNI Touchsoftware package, which gave our

Combining use of spread bettingwith traditional trading strategy Many private investors have recognised that having ashare dealing, spread bet and contract for different (CFD)account, in their trading arsenal, allows them to use theright tool for the right job, maximising potential profitopportunities. Although it’s no secret that more andmore people are opening spread betting accounts thesedays, with the larger brokers seeing over 300 applica-tions per week.

Choosing the right toolGenerally speaking for short termtrades (those lasting a few days),spread betting the cash price hasbecome very popular – with no capi-tal gains tax on profits, extremelycompetitive pricing in a now very liq-uid instrument and no stamp duty topay, it really is difficult to beat. How-ever, the nature of the dealing rela-tionship with spread betting, meansunlike share dealing and CFDs, youare, for the most part betting againstthe broker and hence there is littleincentive for the broker to work withyou to price improve – also lossesincurred on spread betting accountscannot be offset against tax.

Time comparisonsFor longer term investments, weshould compare share dealing with

CFDs or contracts for difference.CFDs, whilst allowing tremendousleverage over regular share deal-ing, incur a funding cost.

This funding cost can rangebetween 2 and 3 per cent on the 90per cent of the position that theCFD provider has effectively lentyou. Traditional share dealingincurs a 0.5 per cent stamp dutycharged upfront. So there is apoint where the CFD funding costssurpass the costs incurred fromthe share dealing stamp duty, andthis is around the 10-12 weekmark- thus if you are intendingholding a position for less than 3months, you are generally betteroff with a CFD.

clients the feel of being in a tradingroom, with real live Level 2 prices anddeep access to the market. Crucially,GNI Touch gives you the ability tointeract with the order book. So thatour clients were effectively placingthe hedge on our behalf. Previously,we would go into the market and fillthe orders. Now, GNI Touch automat-ed that process. We were the first tothe market with such an automateddealing system and it still gives us acompetitive edge.”

And he concludes “Over ten years,the profile of the product is obviouslyso much higher, so more people arebecoming involved. Ten years ago,there was no culture of day trading inthis country, unlike the day tradingthat existed in the US. I don’t want towave the flag too much, but we havereally helped to create the culture ofday trading that now exists in thiscountry. The GNI Touch software, thespecific advantages of CFDs for shortterm traders and our team of experi-enced traders, traders who can getsome very difficult trades done if nec-essary, all that adds up to a packagethat is very attractive to investorswho want to trade regularly.”“We were the first to

the market with such anautomated dealing sys-tem and it still gives us a

competitive edge“

RULE OF THUMB

If the length of your invest-ment carries the followingtime frame, these are - youroptions (broadly speaking):

- For 1 day to week:Use spread betting

- For 1 week to 3 months:Use CFDs

- For 3months+:Use Shares

� Greg Secker

“There are two approaches to offering CFDs. The first is where everything ishedged back to the underlying market and the other is where the CFDprovider makes a risk price to the client. We are brokers and so our approachis to hedge everything back. The difference is that, where you are offering arisk price, then you are making money when the clients are losing and viceversa. Conversely, by staying with the hedging approach, our interests arealways aligned with those of our clients. That might seem like a trite mar-keting point, but it is actually very important.”

Philip Adler, GNI Touch

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET IN ASSOCIATION WITH IX INVESTOR ABOUT SPREAD BETTING AND CFDs, DISTRIBUTED IN THE TIMES14

On the marginsDavid Jones investigates how to approach margin trading.

Spread betting companies providedifferent types of orders that canmean you never need miss an oppor-tunity to get into or out of a trade,orders that can help manage your riskand hopefully help to make your trad-ing life easier. One automatic order isthe limit order. This is designed to get

you into or out of a trade at a morefavourable price than where the mar-ket is currently trading.

Setting limitsWe will assume our trader has a posi-tive view on the UK stock marketindex and she wants to buy £2 per

point. She checks with her spreadbetting company and they quote her6198/6200 – the usual bid/offerspread which means that if she want-ed to buy now she would get in at6200.

She thinks there may be a dipbefore the price moves higher and shewould like to buy at, for example,6150. She can sit and watch the priceday in and out to see if it drops downso she can buy – but the more sensibleapproach is to place a limit order tobuy £2 per point at 6150. By placing alimit order, she is specifying the

What could you do with

£10,000*and some of

the best CFDtrading software around?

We’ll give you A WEEK to find out.This is as close to real as it gets. With a notional balance of £10,000*, you get to take ourtrading software for a genuine test drive, with access to live markets, executing orders, asif for real and in real time. The only difference from the genuine article is that your orderswill be held on our server rather than routed to the exchange. With your balance adjustedaccordingly, by the end of the week, you'll have a very good understanding of thesuperiority of our trading platform reflected in your performance.

Whether you are familiar with CFDs or completely new to the market, we are offeringyou the perfect opportunity to discover the most sophisticated Direct Market Access Paper-trading platform in the business. And the real advantage of CFD trading with GNI touch®.

The number of demos available is strictly limited. To arrange yours, call us on0845 124 7616 or register at gnitouch.com/testdrive

For details, call 0845 124 7616 or visit gnitouch.com/testdrive

* The £10,000 is virtual, not real, allowing you to fully use the system, with no risk to yourmoney. Futures, CFD and Margined Foreign Exchange trading carries a high level of risk toyour capital. You can incur losses far in excess of your initial margin deposit. Only speculatewith money you can afford to lose. Futures, CFD and Margined Foreign Exchange tradingmay not be suitable for you. You should fully understand the risks involved BEFORE you trade:seek advice if you have any doubt. Man Financial is authorised and regulated by the FinancialServices Authority.

CFDs • futures • forex

absolute maximum level she wants tobuy at. If the market drops back to herlevel, her order should be automati-cally executed.

Limit orders can also be used to exitpositions. We will assume our traderended up buying £2 per point at 6150and wants to take profits if the pricegets to 6300 to sell. Once again a limitorder can do the hard work for her.This time around she would place alimit order to sell £2 per point of theindex at 6300. This order tells herspread betting company to only sell ifthe trade can be executed at 6300 or

better – it sits dormant until (or if) thishappens

As a rule, spread betting companiesdo not charge for placing these typesof orders. There are various waysthese can be set up – with CMC Mar-kets for example, the order can be a“Day” order, which expires at the endof the trading day if it is not activat-ed; or “Good Till Cancelled” whichstays in place till executed or can-celled by the client.

David Jones is Chief Market Analystat CMC Markets.

A question of size?Greg Secker tell us how much to buy or how to trade size positions tomanage risk to 1 per cent.

Most people place the same amountof capital on every single trade theyplace, such as “I always buy 1000shares or bet £10 a point” this resultsin disaster and if you’re currentlydoing this, stop it and stop it now,otherwise you’re going to join thelong list of losers and provide cannonfodder for the few of us who are doingthe right way.

On Livetradingfloor.com where wepost our trading results, we haveachieved over 60 per cent in the last 5months, risking only 1 per cent of ourtrading capital on each trade – andthis is the ‘key’ to successful trading.

Remember this golden rule: Forevery trade you place, your trade sizeshould vary and your risk shouldremain constant.

Lets explain this.Imagine you have a £10,000 tradingaccount. The amount you should riskon a trade risk should be no more than1 per cent , or as in this example £100.So rather than plucking a number out

This trade illustrates 3 important con-siderations of trade risk management.

Firstly, notice that the chart initial-ly rises to 450 and falls as it meetsresistance (perhaps the market feelsthe stock is overvalued at this level),as it starts to fall more selling is

attracted and more sellers enter themarket. At this point, the stock dropsin value until it reaches a area of sup-port at 300 (£3) where the marketdeems that the stock is now underval-ued and this attracts a fresh set ofbuyers into the market – bargain

hunters – and the stock starts to moveback up until it hits resistance again,this time at 350 (£3.50). notice thesideways movement between 350 and345 which has now set itself up. Thisis tight consolidation. As traders, welove these areas, as they provide uswith the following, and relevant tothe above example:

1) A decent reward potential – shouldthis stock break out, through the 350range, there are no barriers on thechart between 350 and 450, astraders we can say that the potentialreward is 100 points –all going well.As traders we don’t know or reallyeven expect the stock to run the full100 points from the entry pricebreakout at 350… but from quickexamination, we can see the rewardoutweighs the risk.

2) Now risk… we know that the entryprice is above 350, the second point iswhere should our stop loss (your exitorder if your trade fails) be placed?The answer to this question is gener-ally just below support i.e. just behindthe base of the consolidation at 345,in other words we are looking for thestock to run north from 350, but if itcomes back we expect the 345 sup-port to prop the stock up – should thislevel be breached – we don’t want tobe in the trade.

3) Notice that the risk is only 5 points.So in terms of a ratio, our reward: riskis 100:5 or (20:1)… meaning for every£1 risked, there is a potential £20 tobe made… good odds.

4) So now onto trade sizing – howmuch should be placed. If I was toplace 10 trades like this and only 3 ofthem run into the right direction, and7 trades run against me, then my netprofit/loss is going to be extremelypositive – despite losing on 70% ofmy trades.

5) How do I use this information todefine my trade size? Simple: I dividemy trade risk (remember that’s the 1%of £10,000 i.e. £100) by the risk on thetrade… in this case it is 5 points. So,100/5 = £20 . So I now know the max-imum amount I can risk on this tradeis £20 per point or if you are usingCFDs that’s 2000 shares.

6) Now if the trade runs in our favour,we stand to make a £2000 potentialprofit, for only £100 or 1% of our£10,000 account risked. Perfect.

Greg Secker,Head Trader and Founder of Traders

University Programmewww.tradersuniversity.co.uk

of thin air, or always using a fixed amount, we must determine the trade sizefrom both the trade risk (£100) and the stock chart :

Consider the following diagram:

Are you an active traderor want to become one?

Get instant access to 160+ currency crosses, more than twenty major exchanges and hundreds of contract types. Yours to trade at the click of a mouse – including real time quotes, powerful recommendations and much more.

Tempted? Sign up for our free workshop and take our award-winning platform for a test drive.

Don´t wait. Sessions get fi lled up quickly, and there are only 20 seats per workshop.

REGISTER NOWCall 0207 151 2100, e-mail: workshop@saxobank.com

or visit us at workshop.uk.saxobank.com

Get started absolutely FREE!

FREE TRADING WORKSHOPSNext session Tuesday 27th of February at 6:00 to 7:00 PM,

Saxo Bank, 40 Bank Street, Canary Wharf.For alternative dates, please visit workshop.uk.saxobank.com

REGISTER NOWCall 0207 151 2100, e-mail: workshop@saxobank.com

or visit us at workshop.uk.saxobank.com

Test drive the world´s best trading platform!

T

est drive thTTe

he world´s

best tradin

ng platform

m!

T

For alte

est drive thTTe

Next

FREE

native dates, please v

he world s

erSaxo Bank, 40 Bank

uesday 27th ofsession TTRADING

isit workshop.uk.saxoba

best tradin

eet, Canary Wharf.Strf February at 6:00 to 7:G WORKSHOPS

ank.com

ng platform

00 PM,

m!

ours to tradYYoGet instant a

e at the click of a moccess to 160+ currency

Call

use including real tiy crosses, more than t

or visit us at workshl 0207 151 2100, e-ma

REGIST

ime quotes powerfultwenty major exchang

hop.uk.saxobank.comil: workshop@saxobank

TER NOW

l recommendations anges and hundreds of

k.com

nd much morecontract types.

empTTe

ours to tradYYo

Call 0207

Don´t wait. Sessions

pted? Sign up for our

e at the click of a mo

7 151 2100 e-mailREGIST

,lled up quicklyy,get fi

free workshop and ta

use – including real ti

: workshop@saxoTER NOW

e only 2e ar and ther

ake our award-winnin

ime quotes, powerful

bank com

0 seats per workshop

ng platform for a test

l recommendations an

p.

t drive.

nd much more.

or Call 0207

visit us at worksh7 151 2100, e-mail

hop.uk.saxobank.c: workshop@saxo

combank.com