Spread betting: Risk management – a pilot study

Introduction

Although I am mainly a conventional buy-and-hold investor, the prospect of changes to capital gains tax (CGT) mean that I may need to move my non-ISA funds into a spread betting account to avoid losing income. (Currently a married couple can make £24,600 per annum tax free on capital gains.) The proceeds of spread betting are not taxable and highly unlikely to become taxable. It seemed sensible to conduct a trial of a risk management strategy for spread betting, using real money to test the psychological as well as mathematical challenge. As Minervini has suggested, it is necessary to rehearse with real money, using enough for the losses to hurt, but not enough to wipe out one’s account.

Method

Between 31st May 2020 and 14th July 2020 (45 days) I lay 38 bets using a momentum-breakout strategy based only on price action. Each bet was worth, on average, about a £1000 investment in the shares with a stop loss giving a 10% maximum loss (around £100).

Shares were sold when they hit the stop loss or earlier if they seemed to be moving fast in the wrong direction within the first couple of days. The study lacked academic rigour as I used some discretion over the entry and exit points of each trade.

Results

There were 11 winning bets and 27 losing bets.

The cost of spreads was about £5 per trade (0.5%) - total cost £190.

The winning bets averaged 9.6% profit and the losing bets averaged 5.7% loss (including all trading costs).

The total won was £1037 and the total lost was £1538 giving a net loss of £501 (1.3%) on a portfolio worth a nominal £38,000.

Overall the sold losing shares would have gained an additional £844 in total if I hadn’t sold them, whilst the winning shares would have lost a further £33 (0.3%) in total if I hadn’t sold them.

If I had not sold any winning or losing shares, the portfolio would have been worth £38,313 on 26th July 2020, a net profit of £313 (0.8%) – this equates to an annualised return of around 6%.

Conclusions

  1. I need to do a lot of work on my entry and exit strategy for each trade before using serious money, in particular I need to standardise everything.
  2. My trades would probably do better if I set the stop…

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