Seeing the value of a share portfolio fall sharply over the past year has been unpleasant. While history suggests shares will outperform cash investments over time, particularly if you drip feed deposits during good and bad times, it is hard to ignore the shorter-term frustration with equities. It is no wonder day trading has risen in popularity as people play the volatile markets and try to make money through betting on the movement of shares over very short periods of time, even down to 30-second periods. Intent on making a quick buck, I thought it was time to modernise my investing style from a traditional long-term view and try to play the markets through spread betting.
Armed with £1,000, I give myself three days to make a 20% profit. I use Spreadex’s ShortsandLongs platform, although there are many other online spread betting services to choose from providers, including Barclays, CMC Markets and Paddy Power.
Day one: early mistakes
Gold has been losing its shine over the past few days, so I decide to short the precious metal at $845.2 an ounce. I choose a price of £5 a point. The market is traded per 10c movement. Assuming gold will fall to $844, I would stand to make £60. I put a stop loss at $848, so there is some protection against losing all my money. Here was my first mistake as the margin between the starting point and the stop loss was too narrow. I failed to consider gold’s volatility and its sharp movements soon triggered my stop loss.
The gold trade lost me £140 as it made a 280c movement in the opposite direction to my bet, at a price of £5 per 10c change in the gold price. Fortunately I persevere and make back most of the money on gold on the second day of trading.
The futures prices suggest the US equity market will open strongly. The Wall Street Daily indices is offered at 9,015 to buy and 9,012 to sell. I select the former and relish its sharp movement to 9,036 just before the opening bell. I try to take the profit but the computer freezes! It eases back quickly, so once the PC fires up again I manage to close out at 9,019, netting me £20. Even though I missed out on the big money, that tiny profit boosted my confidence. I even laughed off Wall Street soon jumping back to 9,028, which would have given me even more money. Feeling immortal, I short the indices at 9,027 at £5 a point, buying back at 9,002 to add another £125 to the pot. This is easy money!
Spread betting
The benefit of spread betting is you can trade a diversified range of vehicles including bonds and currencies. My strength lies in UK equities so I consider which stocks to trade. As I called gold wrong, I buy gold miner Randgold Resources (RRS), which tends to outperform gold on the way up. Playing it safe, I bag a £7.80 profit in a few minutes. Talk of China making a swoop on mining assets is driving up Rio Tinto (RIO) so I make a £1-a-point buy at £19.35. Domino’s Pizza (DOM) is enjoying sales growth, so I buy at £5 a point at 194.6p, anticipating tomorrow’s trading update will be good. Jewellery sales have been weak so I short retailer Signet (SIG), which reports in two days’ time. I am confident of bad news, so I put £5 a point at 565.6p, particularly as the stock has been rising over the past few days so it could fall back hard.
I request rolling trades on the UK shares, which is where my bet continues into the next day’s trading. I am only expecting to roll the positions for a maximum of two days as I base most of the trades on imminent news, which will be the catalyst to move the stock.
The FTSE 100 looks like it is pulling back from earlier gains. Sensing an opportunity to make a quick profit, I short the UK 100 Daily in a larger bet of £10 a point. Unfortunately the market had a small recovery in the final part of the session and I lose £120 as the trade hits the stop loss.
Day two: another stumble
Day two was the beginning of the end. My Signet short failed as the market still seemed to think tomorrow’s trading update would not be too bad. It passes through the stop loss and I am down another £320. It is my biggest single loss of the trading exercise and frustrating as Signet did indeed report poor figures a day later and the shares eventually fell. In this case, I put the bet on too early.
I win £38 on Michael Page (MPI), £20 on JD Wetherspoon (JDW) and £11.50 on Domino’s Pizza bets rolled over from yesterday, but it is nowhere near enough to offset the Signet loss.
Rio Tinto’s rolling trade hits the stop loss, another £100 wasted. But I correctly second-guess Scottish & Southern (SSE). It had fallen heavily after a share placing so I buy the stock hoping for a small recovery, which does happen, netting me £8.40. Small beer, but I need all the positives I can get to restock the money pot. My good friend Wall Street is about to open, so I repeat yesterday’s tactic of trading before the bell. A £14 gain is soon wiped out by a £50 loss. Scanning tomorrow’s list of trading updates, Hays (HAS) is a sitting duck as recruitment agencies stumble due to the shrinking jobs market, so I short the stock.
Day three: all over now
Day three sees the Bank of England (BoE) announce its latest interest rate decision, hopefully providing the much-needed volatility in the market for me to return to profit. It starts well with £22 gain on a Marks & Spencer (MKS) short taken two days ago. I win £16.50 on the Hays trade and £57.60 from a second rolling bet on Scottish & Southern.
The assumption has been the BoE will cut rates potentially by 100 basis points to 1%, but if it is just 50 basis points then sterling will rally. I make several trades on the currency, buying and selling, taking small profits as soon as they appear. If sterling does rise on the BoE’s announcement, then gold could also rally, as an interest rate cut would make alternative investments such as gold more attractive. I buy gold but it dips soon after, so I take a high-risk decision to extend the stop loss.
A 50 basis point cut is confirmed, so I quickly lay down a short on the dollar, making £55 profit in ten seconds! I repeat the trade but it messes up. Meanwhile, gold has risen as expected, so I bank my profit. The precious metal price is extremely volatile, so I keep laying down small trades, betting on ‘buy’ and ‘sell’ movements. A £34 win soon becomes £124! Then it fails. I lose £260 over three trades after becoming too greedy. You must be prepared to walk away when the going is good.
I’m left with £190 to trade and no open positions. A quick punt on Wall Street’s opening position boosts my finances by £96 so I decide to go all-in. The main UK shares are starting to wobble so I predict the New Year stock market rally has ended. A short on the UK 100 Daily at £2 a point could work nicely. I want to raise the stake, but the minimum stop loss stipulated by the spread betting provider means I only have enough cash to cover a fall at £2 a point.
Lessons learned
The market closes and my rolling trade is still in play. Here is where I make a fatal error. At 4.40pm, I notice the trading button has disappeared so I presume the spread betting system has shut up shop for the night. When I log on the following morning, I smile with great joy at the FTSE having fallen as predicted. Unfortunately the celebrations were cut short when I see an email notification my trade stopped out at 8pm last night. I’m bust, but how did this happen? A quick call to Spreadex reveals the absence of the trading button yesterday at 4.40pm was during their 15-minute daily down period, when trading is suspended as the auction closes on the day’s FTSE positions. If I had still been at the office, I could have recommenced trading at 4.45pm until their system shuts down at 9pm. So while the FTSE may have been closed after 4.30pm, spread betting systems are still operational for another few hours and give prices for tomorrow’s predicted opening.
I am broke and embarrassed. My track record on share tips is generally good (see Shares Plays of the Week) but day trading has required different skills. You need to recognise triggers and in particular second-guess market movements over very short periods of time. This seems to confirm what the economist John Maynard Keyens said about markets when he argued investing in them is akin to betting on a beauty contest – the trick is not to select which stock (or contestant) you believe to be the prettiest but the one which you think the judges (or other market participants) will like the most. I would have to say it requires more luck than long-term share-picking. Trading can be very fast paced and demands your full attention. I kept being distracted by other activities at work and missed trading opportunities. For anyone with the time and resources, day trading through spread betting can be a fruitful and exciting method of investing. Making trades is very straightforward but the risks of losing money are high. If market volatility returns, it is certainly the fastest way to make a profit. Just remember to keep a level head.
Dan Coatsworth ran a test account
worth a notional £1,000 on Spreadex’s ShortsandLongs.com platform on 6, 7 and 8 January 2009.
GOOD TRADES
Wall Street Daily, buy at 9,002, WON £125
Gold, buying and selling across a variety of trades. WON £124
Wall Street Daily, buy at 8,667. WON £96
Scottish & Southern Energy (SSE), sell at £11.74p. WON £57.60
Michael Page (MPI), buy at 209.7p. WON £38
Marks & Spencer (MKS), buy at 235.9p. WON £22
JD Wetherspoon (JDW), buy at 314.5p. WON £20
Domino’s Pizza (DOM), sell at 196.9p. WON £11.50
BAD TRADES
Signet (SIG), buy at 629.6p. LOST £320
Greggs (GRG), buy at £34.11p. LOST £133
GBP/USD (March), buy at 1.5179. LOST £110
Rio Tinto (RIO), sell at £18.36p. LOST £100
Tullow Oil (TLW), sell at 723.6p. LOST £78
J Sainsbury (SBRY), sell at 313p. LOST £60
Wall Street Daily, buy at 8,845. LOST £50
UK 100 Daily, buy at 4,593. LOST £48
