How I plan a Spreadbet Trade

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This is without doubt one of those Blogs that I really should have written ages ago, but I guess it has not even occurred to me before to do it because it is about something that is so mundane and everyday for me, that I didn’t even figure that actually it might be quite useful for Readers.
 
For many years now I have been utterly obsessed by Hedging my Portfolio of Stocks and Long Spreadbet Positions by using Short Spreadbets on Major Indexes such as the FTSE100 and the S&P500. I think the simple truth is that I have always had a fascination with Technical Analysis (the posh name for ‘Charting’) and part and parcel of that is Short-term Trading which is very much an approach which will not work without a good understanding of some basic Technical Signals/Principles. Thankfully this experience and practice with Shorting has really helped me a lot in the current Market difficulties.
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Using Shorts to Hedge a Stock Portfolio for tough times very much plays into this Short-term Trading idea and allows me to satisfy urges I have that way. In fact, if you have been keeping up, you might have noticed me mentioning towards the end of last year and at the start of this year, that I wanted to do more Index Long Trades as an addition to my normal Share activities but of course the sudden turn of events with the Virus crisis has rather scuppered any ideas of going Long much. I have spent a lot of money and time in messing about with Shorting Indexes in recent years and refining what works best and after much pain and angst, I think I have got to an approach which can work most of the time and you can read about it here:
 
https://wheeliedealer.weebly.com/educational-blogs/wheelies-new-improved-index-trading-system-part-3-of-44826674
 
That is a Link to Part 4 but if you scroll to the bottom there are Links to the earlier chunks.
 
Now I want to emphasise that what this Blog is about is the few minutes before I place a Short or Long Trade in my Spreadbet Account. In this Blog I will not talk too much about the Signals I might have used to decide to place the Trade and I will not mention much about how and when I make the decision to Trade in a particular way, it is ideally not a snap decision and normally I have been building up to the Trade for a few days at least as I watch the Index Charts every night and see how things are developing. I very much take the view that if you are rushing a Trade, then you are probably just about to make an almighty balls-up.
 
So what I am saying is that all the Analysis and thinking has been done and I am about to place a Spreadbet Trade on an Index and usually just after I have grabbed my 10 inch Tablet on which I execute the Trade on the igIndex App; and I have grabbed an old envelope from my stack of discarded envelopes I save up just for this purpose of writing down the parameters of the Trade (i.e. the Trade Plan); these are the steps I think through and I write down on my old envelope:

• Date of the Trade.

 

• Index to be Traded. Most often this will probably be the S&P500 for me because it is perhaps the most liquid and with 500 or so constituents it is a good representation of Global Markets which tend to be very highly correlated, especially when Markets are very grumpy. I do sometimes use the FTSE100 but it is a pretty sub-standard Index because it has crazy weightings to big Oil Stocks like RDSB and BP. and the top 10 constituents make up something like 40% of the weightings so it is not really a great representation of what is actually happening. Some of the Indexes like the German DAX and the French CAC40 have a tiny number of Stocks in them (the DAX has 30) and again these aren’t great to use. The FTSE250 and some of the Sector Spreadbets are good but they have the drawback of needing much more Deposit/Margin than the S&P500 and you can only place Trades on them during Market Hours. With the S&P500 and other Major Indexes you can place them pretty much 24 hours except at Weekends when you have special Weekend Spreadbets (these are pretty useless unless you are an obsessed Trader and in my view, you would be far more successful if you took the Weekends off and recharged your psychological batteries). The DOW can be used but again it is just 30 Stocks and not all that representative.

 

• Size of the Trade – this is the ‘£s per Point’ that you are going to bet. This is of utmost importance and it never ceases to blow my mind that there are people out there messing around with Spreadbets who have no concept of ‘Exposure’ and what that means. It is crazy and no wonder they lose money. This is perhaps the most important decision you need to make in your Trade Plan. In simple terms, if you bet £1 a Point of the FTSE100 at 5324 and you go Short, then you have Exposure equivalent to as if you had £5324 of Shares that you are selling Short. OK, let’s do it the other way. If you go Long at 2486 on the S&P500 at £10 a Point then your Exposure is £24,860 and it is like you have Shares worth £24,860 in the Market. If you do not understand this then apart from the fact you should be going nowhere near using Spreadbets and Leverage, you can look out my Spreadbetting Blog Series and that will explain everything hopefully (ok, I will put a Link at the bottom of this Blog). If you have a Trade Size which is too big then you will get into trouble and if your Trade Size is too small, then you will probably be annoyed with yourself later; although I would say that in general it is better to err on the side of caution and have a Trade that is too small rather than one which is too big which can get you into a right old piccalilli.

 

• Expected Open Level – there is obviously some variation here so I tend to take a rough approximation of where I expect to Open the Trade (the prevailing Buy or Sell Price on igIndex usually is what I use but you don’t need to be 100% spot on). I need this because when working out a Stoploss Level, I need to allow for my Open Price so that I can calculate how much Money I will lose if the Stoploss gets triggered. Once I actually get around to placing the Trade, which is usually a matter of minutes after I create my Trade Plan, I can normally go ahead and hit the Buy or Sell Button but if the Open Price in reality is wildly different, I will go back to square one and rethink firstly whether or not I want to place a Trade and secondly what my new Trade Plan will be.

 

• Margin/Deposit – this is the amount of Money I expect igIndex to want for the Position to be Opened. Because I tend to do Trades of a similar size or at least in multiples of ones I have done before, it is very easy to guesstimate what the likely Margin/Deposit will be and once the Trade is actually Executed, I write down the precise value of the Initial Margin/Deposit. Later I will enter this Margin/Deposit figure into my Spreadsheet that records all my Trades and the exercise of estimating the Margin is useful because there is no point opening a big Position if you don’t have the ‘Cash Available’ to cover it (and/or if you use up too much of your Cash Buffer which you need anyway to enable your Positions to wobble about a bit).

 

• Degree of Hedging – if I am Opening a Short Position to help Hedge my Long Trades and Shares, then I will use the Exposure that I calculated above to work out the percentage of Hedging that I have against my Long Portfolio. This is very much a matter of personal preference and the Cash Buffer you have available and I tend to max out at around 50% Hedging. I have had more than that in the past and it gets a bit unwieldy to manage – especially if your Short Spreadbet Positions massively outweigh your Long Spreadbet Positions. If this is the case, you will find that a strong Rally in the Markets, like you often get in Bear Markets when you are most likely to be Hedging, will chomp through your Cash Buffer at a rapid rate and you will not be getting much Offset from your Longs. It is one of those things where you just have to do it and after a while you sort of find a level you are comfortable with. To work out the Degree of Hedging, I take the £s value of my Hedge Exposure and calculate what % of my Long Portfolio Value this is. When I report on this on Twitter and the Website ‘Trades’ page, I tend to express it as a % Hedging against my Starting Long Exposure of Long Spreadbets and normal Shares on January 1st – that tends to understate the % Hedging at the moment because the Value of my Portfolio has dropped since January 1st – I am aware of this and will probably amend how I do this so it is more useful. At the top of the PDF document igIndex sends to me every day by email, there is an Entry that has my Long Exposure via Spreadbets and my Short Exposure and a Net Position – I find that very useful but it is usually a day out of date so you need to watch that.

 

• Stoploss Level – this is probably the most important bit of the Trade Plan process and sometimes I will actually work it out later after whacking a Trade on quickly during the day; although this is not my preferred way of doing things as it is a bit knee-jerk and panicky. However, in the recent heavy Sell-off there have been a couple of times where I had been thinking about adding another Index Short for a few days and on a particular day things just drop through the floor and I have whacked a Short Trade on fast – I then do all the Trade Recording and Stoploss etc. stuff later on when the Markets have Closed. Placing of my Stoploss is very much linked to the Trade Size – if my Stoploss is very wide then I will have to do a smaller Position Size because a wider Stop means more Money will be lost and I don’t want the Actual £ Loss to exceed 1% on a Trade normally. However, I am flexible about this and especially if I am Hedging (where any move against me on a Short is largely compensated by an off-setting gain on my Longs) then I might go up to as much as 2% on a Trade but when I do this, I am looking to lower my Stoploss Level very early on in the lifetime of the Trade so that the £ Loss I will make is a lot smaller. I have written about Stoploss Levels many times in the past and I will probably talk about them more in my future Charts Blogs especially, but the essence of the process is that if I am going Long on a Spreadbet, then I look below where I am expecting to Open the Trade and I look for areas of strong Support where Buyers are likely to come in if the Price falls back. I will then choose a Price Level just below this Support but I do not use ‘Hardcoded’ Stoplosses with igIndex because it is so likely you will get ‘Stopped out’ when the Price spikes down during the day – only to then reverse and go your way !! My method is to write down my Stoploss Level on my Records Spreadsheet and on my SharePad ‘Working’ Screen I draw a Horizontal Pink/Mauve Line which marks the Stoploss Level (I usually do a quick Text Box with the key information of the Trade in it as well). It is easy then to see if it is hit by the Price falling back and it is only if the Price Closes below my Stoploss Level that I will manually go into the igIndex App and Close my Trade. There is some flexibility around this but painful and expensive experience has taught me that strict discipline is best with regards to Stoplosses although in practice if I see a Trade going against me early on, then I will sometimes Close it before getting to my Stoploss Level and I will take a smaller hit. If I am going Short then it is the opposite of this process and in this case I am looking for Areas and Levels of Strong Resistance and my Stoploss Level will be placed just above this. Once I have a Stoploss Level in mind, I will then work out how much I will lose if the Stoploss is hit according to the Trade Size (£s per Point) I have in mind and if the hit will be too much, then I will either choose another Stoploss Level or I will reduce the Size of the Trade. Sometimes I will increase the Trade Size but that is unusual really as you need to consider the Deposit Margin and the Hedging level etc.

 

• Target – to be honest this is something I play lip-service to a bit and I don’t get too hung up on it. I have a column in my Trade Records Spreadsheet so I always have a Target but in reality if a Trade is going my way I am constantly monitoring it (especially every night on the Charts) and I will run it as long as I feel comfortable – the longer the better !! Proper Professional Traders use ‘Risk/Reward’ Ratios where the amount they will gain if their Target is hit is divided by what they would lose if their Stoploss is hit and they have a minimum acceptable result or they don’t do the Trade. It is probably a good discipline but I can’t get excited about it !!

 
After I have done the Trade, there are a few things I have to do. Firstly I send out a Tweet immediately after placing the Trade and this lets WD Readers know very quickly what I have been up to. Next I logon to the Weebly.com Editor thing and I enter on the ‘Changes List’ on the WD1 Homepage that I have done the Trade and I refer Readers to the ‘Trades’ page where I then fill in more details on what I have been up to. It is all there so nip over and have a look.
 
The next thing I do is to go to SharePad and on my ‘working’ Chart, I put a Horizontal Line on it in Blue at the Level at which I opened the Spreadbet and it starts on that day and then I put on another Horizontal Line in a sort of Pinky colour which marks where my Stoploss is. I always do Stoplosses as something I execute manually myself if the Stoploss gets hit on my Chart on an End of Day Close basis. In other words, if I am Short on a Trade and the Price Candles spike up through my Stoploss Line but then drop back and Close below (sharp Readers will recognise a Bearish Shooting Star Candlestick from this description), then I may keep the Trade running because it has not Closed above my Stoploss level. Doing things this way can mean ‘overshoot’ is a risk but the big advantage is that you do not get ‘Stopped out’ on a Spike that happens intraday which is a common occurrence if you use ‘hard coded’ Orders with your Broker. I take the view that it is better to be on the Train when it pulls out of the Station than to be left there open-mouthed and speechless looking at it go away from you !!
 
I usually then write a quick Text Box on SharePad which describes the Trade – something like ‘1st April 2020 FTSE100 Short at 5324 equivalent to 15% of Long Portfolio with Stoploss at 5600 on an EOD Close basis, Manual Trigger.’
 
I then open up Microsoft Excel and find my igIndex Spreadsheet and I make the required entry to record the Trade in detail. You can see an example of my Spreadsheet here and in theory you can download it:
 
https://wheeliedealer.weebly.com/educational-blogs/spreadsheets-for-recording-your-trades
 
OK, that’s it. Now this has been focused on Index Trades that I place quite often late at night, but in fact this kind of Trade Plan can be used for any Spreadbet Trade and if you are more of a Short-term Trader using normal Shares, then you could also adapt what I am doing here to your needs. Feel free, I ain’t precious.
 
What I will say though is that creating such a Trade Plan as this is essential in my view. If you do not do this, and you are slap-dash and doing things in your head, then you will likely screw up. The discipline of doing this Trade Plan exercise is much more likely to lead to you being successful with your Trades and at least when they go wrong, your Losses will be contained.
 
Good luck with it all anyway,
 
Cheers, WD.
 
 
Related Blog
Here is the Series on Spreadbetting and I recommend you read this if you play with Spreadbets and are finding it tough (there are links to the earlier parts at the bottom of this one):
 
https://wheeliedealer.weebly.com/educational-blogs/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-7-of-7