Spread Betting

[superfrank]

I've changed my mind recently about spread betting. I used to do sports spread betting when it started years ago. I then dabbled with financial stuff but never treated it as a serious trading vehicle because I assumed that they took the liability and that they'd close you down if you started making consistent money. A guy from IG Index called me a while ago (to ask why I wasn't using my account much) and it was an interesting chat. They do take some liability but also hedge any larger positions on the futures markets and he assured me that winners are welcome and that they have may of them (never take the stats about %winners too seriously as this includes the vast majority who deposit a few hundred quid then blow it soon after).

I trade futures directly for intra-day stuff (because the transactions costs are lower and the day trading margins are low), but for trading periods longer than 1 day spread betting makes a lot of sense - you can get more leverage, the spreads are not too bad for certain markets, and of course it's tax free - unlike Betfair!, the PC is a tax let's face it).

IG Index recently changed all their daily cash bets to DFBs (Daily Funded Bets http://www.igindex.co.uk/spread-betting ... -bets.html) which automatically rollover (for a charge) similar to forex markets, but they also offer longer term markets tied to the associated futures contract (wider spreads but no charges).

I'm interested to know others' views on spread betting...

[mulberryhawk]

Im hoping to be and happy to be proven wrong ,but I have to admit Im wary and sceptical about spread betting and day trading in general. Purely due to the fact that if you believe in the random walk theory or that the markets represent a zero sum game ,can you profit when the transaction charges will erode your profits eventually?

Also the rise and rise of betting companies and spread betting companies that are so evident in sponsorship these days like fxpro for Fulham etc would suggest its a pretty profitable business model. Watch bloomberg or cnbc and their breaks are littered with adverts for spreadbetting and trading companies. Reading jesse livermores account of his trading in the roaring 20`s and these companies begin to sound alot like the bucket shops he refers to.

In short would it be true to say like the mug punter who bets daily they will eventually lose due to the book % being tilted in the bookies favour, the same could be said for the day trader who the trades more frequently will just pay his winnings back to the house inevitably. Of course its likely to be different if you take a longer term view like buying and holding gold but that could be compared to a gambler who takes a long term view on an ante post classic race or something similar. I have been left with the impression that if you want to day trade the best option to do it is with a prop trading firm as due to the costs being spread more widely its more likely that you would be profitable. Am I way off here or even being a tad too negative?

[Iron]

With Betfair, you have transaction charges, yet people make money consistently, so I don't see that as an argument against intra-day trading.

BTW, the financial markets don't walk a random walk. Some academics might disagree, but their belief flies in the face of the records of trend followers who have averaged 20% profit over decades and thousands of trades.

Jeff

Purely due to the fact that if you believe in the random walk theory or that the markets represent a zero sum game ,can you profit when the transaction charges will erode your profits eventually?

[superfrank]

You could argue the same thing about sports trading, and how many people are successful trading 4 mins before each horse race? Loads.

Day trading has a bad name because lots of numpties think it's an easy way to riches and lose their shirt.

How many people give sports trading a go and give up because they lose? Loads.

Some many people think that sports trading is different in some way, but they're just markets.

People need to see outside the cocooned world of Betfair and Betdaq and realise that if they can trade sports markets by just watching the price action/trend, and not some manipulation strategy, then they can probably trade other things too.

Some of the edges are different, but the principles are the same.

[superfrank]

Take a look at this price action from my DAX futures 610 volume chart from the last few hours...
http://img691.imageshack.us/img691/3382/fdax.jpg

Futures equity markets are often choppy in the hours before Wall Street opens (because they don't have a clue which way it's gonna go!). It's often a good edge just to be contrary and trade the range and get out if it breaks.

[mulberryhawk]

Surely everyone is allowed to have an "objective" point of view and express it. Jeff just because you worship at the alter of trend following and choose to believe whatever annecdotal evidence you want, doesent invalidate academics who have submitted thorough ressearch to counter your beliefs. If trend following was so profitable why does micheal covel feel the need to write so many books about it instead of trading?

The difference with sports trading in my view is that you can make a market and there is no round trip fees which means you can scratch losing trades. Also due to the book % the market can in theory only go so far which reduces the risk in opening a trade as the market had a higher probability in returning to the mean.

Im not cocooned in a world of betfair or betdaq but im just pointing out the fact that these spreadbetting companies appear to me to have many simaliraties with betting firms and the more you bet with betting firms and the more you trade with spreadbetting firms the more of your edge is lost to the book. Again I have no particularily strong opinion but Im just pointing out what I seem to be the drawbacks to trading profitably with a spreadbetting firm.

[Iron]

Where's your edge when you're range trading?

That's not a rhetorical question, btw. I'm not sure where the edge lies when range trading (whether on Betfair or in the fianancial markets), even though I realise that some people can do it profitably.

Jeff

It's often a good edge just to be contrary and trade the range and get out if it breaks.

[Iron]

Surely everyone is allowed to have an "objective" point of view and express it.

Agreed

Jeff just because you worship
at the alter of trend following

There's no need to be condescending.

and choose to believe whatever annecdotal evidence you want

The evidence isn't anecdotal. It's not an anecdote that John W Henry became a billionaire using a simple trend following algorithm. Nor is there anything anecdotal about the records of trend following hedge funds, or the trend following backtesting that people have performed.

doesent invalidate academics who have submitted thorough ressearch to counter your beliefs.

With respect, you're assuming that they've even conducted research, and that they aren't arguing their point from a theoretical standpoint.

If trend following was so profitable why does micheal covel feel the need to write so many books about it instead of trading?

He does trade...

BTW, I'm no Covel fanboy; Mr Covel and I have had disagreements previously, and he's been pretty disparaging of me!

The difference with sports trading in my view is that you can make a market

You can do that in the financial markets too, but not with spreadbetting.

[/quote]Also due to the book % the market can in theory only go so far [/quote]
Ditto with financial markets - the FTSE isn't going to go into negative territory anytime soon.

Jeff

[superfrank]

Where's your edge when you're range trading?

That's not a rhetorical question, btw. I'm not sure where the edge lies when range trading (whether on Betfair or in the fianancial markets), even though I realise that some people can do it profitably.

Jeff

It's often a good edge just to be contrary and trade the range and get out if it breaks.

At these times just being contrary, simply buying the dips and selling the peaks. IMHO the important bit is the exit, people lose day trading because they panic out at the first sign of trouble (tight stops are not what they're cracked up to be), and conversely, bank profits when they're a few ticks up.

It obviously depends on the market and what's happening at the time. If it turns out that it's not trading in a range then you'll probably lose.

If you can get out on a move in your favour as much as possible (either for a profit or a reduced loss) then, given a big enough sample size, you should make money if being disciplined.

mulberryhawk - I wasn't having a go at you.

[Iron]

Superfrank -

When you're trend trading, your edge is the fact that markets over-react, meaning you'll profit long-term if you cut your losses and let your profits run.

But if we assume that trend lengths in a range are normally distributed, as the market isn't forming a bubble, then going for x points' profit with a y point stop will result in you breaking even if you didn't have any transaction costs. With transaction costs, though you'd come out behind.

In light of the above, it seems to me that the basis of profitable trading within a range has to be the assumption that, if the market is ranging, it's likely to continue ranging. Would you agree, and would you say that's a safe assumption to make?

Jeff

#

It obviously depends on the market and what's happening at the time. If it turns out that it's not trading in a range then you'll probably lose.

If you can get out on a move in your favour as much as possible (either for a profit or a reduced loss) then, given a big enough sample size, you should make money if being disciplined.

[superfrank]

Superfrank -

When you're trend trading, your edge is the fact that markets over-react, meaning you'll profit long-term if you cut your losses and let your profits run.

But if we assume that trend lengths in a range are normally distributed, as the market isn't forming a bubble, then going for x points' profit with a y point stop will result in you breaking even if you didn't have any transaction costs. With transaction costs, though you'd come out behind.

In light of the above, it seems to me that the basis of profitable trading within a range has to be the assumption that, if the market is ranging, it's likely to continue ranging. Would you agree, and would you say that's a safe assumption to make?

Jeff

I understand trend following but it's a much more successful strategy over longer timeframes. I'm just talking about an example of intra-day range trading here. Yeah you're backing you're judgement that more often than not it's likely to continue in a range rather than breakout, of course you have to look for opportunities when that probability is higher, just like with any edge.

[Iron]

How can you be confident that, over 1000 trades, your profits will exceed your losses?

For example, is your strike rate so high that it easily compensates for the occasional loss?

As for trend following on smaller timeframes, I would say that purely mechanical trend following isn't applicable to (say) the 5 minute timeframe, because the market isn't really going anywhere most of the time. But if you can jump onto a nice trend like that shown in the diagram, it's a different matter IMHO...

Jeff

Yeah you're backing you're judgement that more often than not it's likely to continue in a range rather than breakout, of course you have to look for opportunities when that probability is higher, just like with any edge.

[superfrank]

Play the casino, as Mark Douglas calls it.

I've made much more from financial trading today than I could ever do trading a crappy 2 card Monday afternoon on the nags!

[Iron]

I don't dispute that you have an edge; I'm just trying to understand which market inefficiencies you are exploiting to create your edge (as it might help me develop one of my own!).

Jeff

Play the casino, as Mark Douglas calls it.

I've made much more from financial trading today than I could ever do trading a crappy 2 card Monday afternoon on the nags!

[Iron]

BTW, speaking of market irrationality, this Twitter quote from Robert Peston made me laugh:

'US government debt loses AAA; flight from risk; price of US gov debt rises coz seen as safe haven. Rational markets or bonkers markets?'

Jeff