Don't Gamble: Spread Betting and Gambling
Spread betting might be taxed as a gambling activity, but that doesn't mean you should treat it like one. The difference between trading and gambling is quite significant, and it is an important one to bear in mind for the would-be successful trader. While the urges towards pushing the boundaries and going for that larger win are the same, the rules of engagement need to be totally different if you are to expect different results.
Bear in mind that the gambling industry generates multiple billions every single year, which is made up almost exclusively from the difference between the winnings paid out to gamblers and the stakes paid in to the bookmaker or casino - hardly a ringing endorsement of gambling as a way to make money.
Likewise, when it comes to trading the markets some will gamble and take decisions that just 'feel' right, sometimes even with very little or no research to back them up. It could be jumping in to an unknown position, backing up more heavily than you should behind a 50/50 position or just taking a wild stab in the dark. While you might hit it lucky and actually win that particular trade, the moment you start taking uninformed gambles over researched, logical positions is the moment that your trading career is in trouble.
The Difference Between Gambling And Trading
The main difference between gambling and trading is manifest in the risk each strategy poses. A gambler knowingly takes on risk and is prepared to stake his money on a chance outcome. The FTSE might finish up on the day in 62 days time, or it might be down on February 22nd at 3.22pm, but without thorough and detailed research there's no valid reason that you should be taking this risk. OK, you might be rewarded with long odds from a bookmaker, but the chances are that a decision like this could easily go one way or the other. Worse still, if you don't know what you're talking about you could be backing an extremely unlikely result. Ignorance can and will cost you money.
Trading on the other hand is a much more reasoned and logical practice. You're not staking money and crossing your fingers - the idea with sensible spread trading is to research the markets, and gain an understanding of the factors that come to bear on their movements in either direction. This process of researching your markets helps stack the odds more so in your favour, and helps reduce your exposure to risk down to the bear minimum.
How to Know When You're Gambling
The difference between gambling and spread betting lies almost squarely in method. When spread betting, there are broadly three decisions you can take, each requiring its own justification. Firstly, to open a position - ask yourself the reasons why a position will make you money before you enter it. If the logic is weak, or doesn't have any rationale underpinning it, you're probably taking a gamble and an unnecessary risk. Secondly, you can close a position - could this position run on and make you more money, or has it peaked? Don't just close out on a whim or because you get nervous - base your decision solely on the data. Thirdly, you can do nothing - again this needs its own justification. Are you doing nothing because you can't think what else to do, or is there a valid reason for holding on to your position?
If you find yourself unable to link up a thought process in your decision making, you're almost certainly taking a gamble that could work against you. The more gambles you take, the greater chance there is of a large, damaging failure. Make sure you're trading on reason and on the strength of your research work for best effect.