Introduction to Spread Trading

• Basic Concepts of Spread TradingBasic Concepts of Spread Trading

• Introduction to Technical AnalysisIntroduction to Technical Analysis

• Building your Trading PlanBuilding your Trading Plan

Overview

Tonight we will talk about…….Why Spread Trading?

• Instant, cheap, simple

• Accessable

• No capital gains tax

• No stamp duty

• No currency risk

• Go long or short

• Stop loss and profit orders

• Great way to learn about financial markets

• Leveraged….less capital required than if buying stocks, etc.

Advantages over Traditional Share Dealing

• Cost efficient

• Capital efficient

• Ability to ‘short’ the market

• Thousands of instruments to trade

• Instant Execution

Why Marketspreads?

• Irish owned and based

• 24 dealing desk in Dublin

• Personal Trading Mentor service

• Ongoing education

• Regulated by the Irish Financial Regulator

How does Spread Trading work?

Don’t buy/sell the actual shares

Trading on price movement

Trade on margin Deposit % total exposure vs 100% with broker

Stake per point movement in given direction

e.g. €1/pt, buy RYA @ €4.00, sell RYA @ €3.20 => profit €20

Close at any time within a specific time period

Rolling vs Quarterly contracts

Make a profit if price goes in your direction, loss if it goes against you

Long vs Short

Steps in placing a trade

• Choose your instrument

• Check the price

• Check the IMR

• Take a view e.g. Long vs Short

• Decide on your stake e.g. €1/pt (€1/pt vs buying 100 shares)

• Calculate overall exposure

• Manage upside and downside i.e. Stop Losses and Limit Orders

New Aspiring Trader

Example 2

•Farmer opened account in January with 4k•Interested in trading currencies•Went long €/$ at 1.45•Bad timing, dollar strengthened…..•Let it ride……€12 a point stake•His trading Mentor had told him that stake was too high…..•Eventually closed….losing his deposit•Dollar now at 1.23

New Aspiring Trader

Example 3

• Galwegian started trading this year• Aimed for a 20% return• Looked at various things like Gold, Oil but realised too volatile• Started researching stocks• Settled on CRH; Standard Chartered Bank….low exposure

to UK property and well developped in Asia and Africa• CRH at 17.50 and SCB at 15.20….stop losses 100 points away• Went on holidays• On return CRH stopped out at 16.50….loss of 10% of his capital• Standard had shot up to nearly 18• His capital had increased by 40% in less than a month

Cautious Capital Augmenter

– When analysing stocks or other markets, the time frames you use are critical

– Start with the longest time period usually monthly or weekly and then work up to a recent daily which includes the last 20 days of prices

• Weekly (long term) -> 3 – 5 years• Daily (medium term) -> 1 year• Hourly (short term) -> 1 – 3 months

• or for intraday traders

• 4 Hour • 30 minutes• 5 minutes

Characteristics

• Very specific return objectives, eager to outperform prevailing interest rates and other asset classes

• Typically trades in stocks, holding positions for longer periods of time, building up balance gradually

• Careful management and utilisation of risk management tools

• Generally has convictions re particular instruments

Cautious Capital Augmenter

Understanding the concepts of support and resistance is vital in developing a disciplined trading strategy.

Prices are dynamic, reflecting the continuing change in the balance between supply and demand.

By identifying the price levels at which these balances change we can plan not only the price level at which to purchase but also the level at which we can subsequently sell (and vice versa for a short trade).

Whilst these levels may be created by the markets subconsciously they represent the collective opinions of the participants in the markets.

Example 1• Shop-owner from Monaghan, age 51, started with 40k

• Shares & Commodities….Lloyds, Medtronic, Silver etc

• Typically holds 4 positions, gradual stakes, in 3 / 4 weeks

• Bets €10-€100/pt, depending on the profile of the instrument

• Doesn’t use risk management tools i.e. stop-loss and limit orders

• Went long Hecla Mining at 333, increasing stake gradually

• Got to 430… closed all positions, taking a profit of approx €7.2k

• At beginning had balance of €43k, now at €107.5k……. a 150% return!

Cautious Capital Augmenter

Example 2• Successful D6 client just started a new trading cycle in August

with 100k

• Mostly US shares….Apple, Leap Wireless, Bank of America, Caterpillar

• Balance rose to €105k having taken very little risk

• Biggest winning trade €2600 on Caterpillar

• Biggest losing trade -€1600 on Bank of America

• Takes a gradual approach to building balance

• Very strong on technical analysis

• Trading with us for 2 years….down 5k on this cycle now but is likely to bounce back.

• He’s back at 95k….made 5k on NII Holdings a Latin America mobile comms company….has made €2,500 shorting John Deere this month

Characteristics

• Likes the idea of quick large gains

• Higher than average risk appetite in return for higher than average profit

• Not overly concerned with market fundamentals, trades based on technical analysis/tips/’gut feelings’

• Particularly interested in Indices, Futures & Forex due to leverage

and volatility

High Risk/Reward Trader

Example 1

• Dublin businessman started with 25k in August ‘07

• Indices, Irish stocks….Dow, IBEX, Smurfit Kappa Group, Bank of Ireland etc

• Frequent trader, high stakes (€100/pt), utilises risk management tools

• Sold €100/pt FTSE at 5043 on 24th September 2009

• Placed take profit order at 4,975, filled 8 days later, recording a profit of 6.8k

• On 5th October went long BP Rolling by buying it at 532. He continued to build up this position over the next week by buying a further €100 per point in two lots

• On the 14th October he closed his position out at 554.5, as he felt that the stock was reaching its resistance levels, recording a profit of €4100

• On 30% profit on his trading this year

High Risk/Reward Trader

Example 2

• 45 year old Dubliner in Financial services

• Follows gut instincts, listens to talk around town

• Took a large punt on INM going long at 50c

• Put €3000 a cent movement all in one go

• Position started going against him.

• Still convinced it was going to turn…let the position run.

• Eventually closed the position at around 30c

• Losing a very hefty 60k

High Risk/Reward Trader

High Risk/Reward Trader

Example 4

• Nov 09, Tipperary farmer, starts at 10k + another 20k in

• Lost 2.5k buying BOI in €20s & €50s cutting losses at 10 pt stop loss

• Does €150 in 2 lots on ILP averaging in at 3.50 no stop orders

• Reaches open loss of €7500 but hangs in and takes a profit at 3.74

• On Dec 7th shorts Elan with €100 at 4.20……

• And has bought another €50 of ILP

• Where to for this trader…..?

• Have given him the dos and don’ts advice but….he’s happy as he goes

• Currently down 20k overall and long on Ryanair at 215 with a stake of €233…..

Confident Investor

Characteristics

• Knowledgeable and educated trader

• Studies a particular investment area and has a set plan for trading

• Aims to achieve large returns with relatively low risk

• Realises the value of Spreadbetting versus buying shares

• Wants to bypass stockbrokers in order to have direct and instant market access

Confident Investor

Example 1

• Banker from Dublin opened up her MarketSpreads account with €3k

• Trades currencies & commodities, focusing on EURUSD and Gold

• Lost most of her initial funding due to overtrading

• Further €5k focusing on smaller portfolio of instruments

• Doubled her initial deposit to €10k

• Now builds up position sizes to approx €20/pt over 2-3 days

• Closes positions once desired levels have been reached

• e.g. shorted Gold having overall position of €17/pt. Closed out all positions on 16th Nov realising a profit of €5.2k

• Account in healthy profit and making a consistent return.

Confident Investor

Example 2

• 37 year old guy, works for a multinational, experienced investor• Takes quarterly views on instruments, conviction trader, going

long• Small stakes, 10 or so instruments, stop orders 200/300 points

away.• e.g. MSCI Brazil bought at 2792, up to 3575, stop order at

2512• Others in Dow, Silver, Nasdaq, Dax, €/$, SMI, etc.• Has orders on all positions, adjusts very occasionally, sticks to

plan.• Average of 41 days on positions, closes losers earlier.• e.g. bought Silver at 1421, stop loss at 1279, triggered loss of

€570• More than trebled his money last year. Stops trading year end.

Confident Investor

Example 3

• New trader Paul from Limerick, mid 30s, is trading with 100k and wants to make 20%

• Works in financial services and is bullish on stocks and commodities

• Taking positions in copper, platinum, Wall St, FTSE 100, etc. • Risking no more than 2k on each view with wide stops.• E.g. he’s long S&P and is up 1k…..his stops are about 100

points away• Is also €11 long on Nasdaq, up a few hundred euro, stops

well away• Giving his views plenty of breathing space.• Not worried about short-term fluctuations…..is up €2,200• Only looks at his positions once or twice a week.

Tonight we will talk about…….Day/Frequent Trader

                                                                                                                               

                                       

Characteristics

• Trades on the basis of small, short-term price movements

• Very active, buys and sells same instrument very quickly, executes a large number of trades daily and generally has all positions closed by end of day

• Strong on technical analysis and keeps up to date on latest financial news

• Trades using particular systems

Day/Frequent Trader

Example 1

• Merchant from Dublin, Spread Trading for 2 years with MarketSpreads

• With slowdown in economy, had more time for his trading portfolio during the day

• Particularly interested in US Indices and a few Irish shares

• Likes to use large stake sizes and, mostly trades based on highs and lows of price movements

• e.g. if Dow decreases 200 points in the morning, buy at this price with a view to buying into future value

• E.g. in 2008, bought €150/pt Wall St Rolling at 11,012

• Closed out position at closing price on same day, making a €5k profit

• Overall is a successful trader with MarketSpreads

Day/Frequent Trader

                                                                                                                       

                               

Example 2

• Engineer from Cork, age 42, opened MS account in 2009 with €8k• Likes to trade US and UK indices due to high volatility and

leverage• Trades stakes of between €5-10/pt, usually taking profits once

instrument moves 35-40 points in his favour• Trades based on market volatility, using technical analysis as

his primary tool• Has been selling Wall St Rolling at points that he felt were

indicated by RSI and Bollinger Bands• Has made both profits and losses using this strategy, however

overall he has made a 7k loss and has not traded in recent weeks.

Value Hedger

Characteristics

• Has something of value and wants to protect that value against risk

• Could be a share portfolio, company share options, property holding

• Could be an asset in a foreign currency or company exposure to

volatile FX rates or commodity prices.

Value Hedger

                                                    

Example 1: Protecting Options Value

• Guy works for Microsoft, 30 years old, lives in Wicklow

• Got some options at strike price of $20

• Share price had risen to $28

• Worried about price crash, decided to protect value

• Started shorting Microsoft over the next 5 months

• Price went back down to around $20

• In that time he made €13k and was happy that he had hedged his options value.

Value Hedger

Example 2: Hedge on Currency Risk

• Client had US$ share portfolio worth €500k ($735k)• Was worried about further devaluation of dollar beyond

$1.47• Started buying EUR/USD and it went to $1.50• Then it started trending back towards $1.47 and he

started taking profit• Closed his full position as $ strengthened to almost $1.46

and banked over €10k in profit• With strong dollar he’s not active right now…no hedging

need!

Trading: The LessonsTrading: The Lessons

Do• Decide what kind of trader

you want to be• Set your trading cycle

parameters• Set allowable downside

per trade• Ease into positions• Admit that you could be

wrong on a view• Trade only a small number of

instruments• Play well within your

resources• Set profit targets per trade

Don’t

• Bet big amounts in one go

• Over-trade

• Look only at the upside

• Let losses build and build indefinitely

• Set your stop loss orders too tight particularly on volatile instruments

• Be greedy

• Be fearful

• Be vague on goals

Tonight we will talk about…….Different Trading Strategies and StylesDifferent Trading Strategies and Styles

• Systems traders• Momentum traders• Fundamentals traders• Technical / swing traders• Lots of variables…..time input / number of instruments /

Steady v. Volatile, types of instruments, duration, etc.

• ….…so where to for you…..?

Decide what kind of trading is right for you…

• What strategies suit you…….• Where does Spread Trading fit in with your overall

financial strategy…..• We’ll help you any way we can....

– Refund offer for new traders– Your own trading mentor– Seminars, webinars, phone tutorials, dos and don’ts– Training course recommendations

Execution only…….you take control of what you want to do!

Finally

• Brief Platform Demo

• Feedback Forms

• Q&A