The Vicious Cycle

Companies who operate Spread betting and CFD markets such as City Index are always keen to ensure that their traders know the risks of spread betting before they open accounts. Spread betting is a form of leveraged trading, that means that your stake in the market is multiplied by the company, so if you trade wisely then you can win back your original stake many times over, but if events take a turn for the worse you can also lose your original stake many times over.

The simplest, and best advice, is to make sure that you know your market well – don’t try and trade in large sectors, or multiple sectors, but stick to one and learn the way that market works; what events cause the value to rise, and what events cause it to fall. This will allow you to remove some of the blind luck from the process, and mean that when you trade, you are trading on things that are as close to certain as possible.

To some extent it is important to remember that the markets offer self-fulfilling prophecies. Predictions and reports come out all the time, the reports tell us (or they have lately) that the last few months have been hard, and on the back of this they predict that the future will not be great either. Accordingly, confidence takes a blow throughout the sector, which affects how the area performs and the predictions come true. This then leads to another cycle or reports, predictions and slumps.

It is the job of the companies and governments to pull the whole thing around, they inject money into the system, or announce stimulus packages, or plan new movements and new ideas to grow the company or the market that can affect consumer (and trader) confidence, and result in unforeseen growth. This seems to have happened in the retail sector recently, for example, when a predicted drop of 0.9% in sales for October was realised as an actual drop of only 0.1%.

Obviously the process is slow, it is impossible to turn around the economy in one go, no matter how drastic the intervention. All you have to do is look at the US Bank bailout or the Chinese Economic Stimulus Package to find out that the bumps afforded by these actions can be short-lived, but it does help to correct the underlying problems that have caused the global financial crisis, and will pave the way for the markets to slowly return to levels that they reached a year ago.

Part of the art of spread betting is to make sure that you stay abreast of all these developments, all reports suggest that the future will be grim for most companies and for the short term it looks best to trade on the value of companies and indexes to take further drops. At some stage, however, things will turn around, and along the way there will be extreme spikes in share prices – make sure that you see them coming, because one spike could cost you a lot more than you win in months of betting steadily on the share prices to fall.

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