I’ve had a lot of emails over the past week or so, a lot of questions, but the one that just keeps on cropping up goes along the lines of:
“What the heck is fixed-odds trading?”
If you haven’t ventured into fixed-odds trading before, here’s a brief run-down of its finer points…
5 things you should know about fixed-odds trading
1 • As in spread betting, with fixed-odds trading, you never actually own an asset such as a share or currency. Instead, you place a bet that a financial instrument will go up or down from its current level. You can also bet on whether it will achieve, or not achieve, certain levels.
2 • With fixed odds trading (also known as ‘fixed-odds betting and sometimes called “binary betting”) you will always know before you place a bet the possible outcomes of that position: exactly how much you can win or lose.
3 • Like spread betting you can use fixed-odds trading on a wide range of instruments, such as stocks, indices and currencies.
4 • When you place your bet, you’ll be given odds on that – these odds are fixed (hence the name of this type of betting!), so you know exactly how much you can win, and how much you could lose.
5 • Just like spread betting, profits from fixed-odds trading/betting are tax free.
How a fixed-odds bet works
Let’s take a look at a very simple example of how it works.
Let’s say that you’re looking at the US dollar/ Swiss Franc, and you believe that it will go down in the next 4 days.
You don’t know how far it will go down, but you’re pretty confident that that’s the direction it will move in.
So, you log on to your fixed odds broker and place a bet that the price of USD/CHF will be lower in 4 days time than it is now. You select how much money you’d like to make from that bet (say £200), and it’ll tell you the cost of the bet (say £100). That £100 cost is the maximum risk on the bet. If it loses, you’ll lose the £100 and nothing more. If it wins, you’ll win £200.
That’s a very simple example, but there are many different kinds of bets you can use with fixed-odds, depending on what you believe the markets will do …
A few tools that the fixed-odds trader uses
• Up or down bets: Literally, you’re betting on whether the market will go up or down within a particular time frame.
• One-touch bets: These are bets you can place that an instrument will hit a certain level within your stipulated time frame. Let’s say you think that the FTSE will reach a certain level, say 5000, in the next 2 months. If your prediction is right – you win. If you’re wrong, then the bet expires and you lose your stake.
• No-touch bets: If you think that an instrument won’t break a certain level within the next month, you can make a bet on that prediction. If you think that the instrument is range bound, you can make a double no-touch option, which means that you predict it won’t move above or below the levels you’ve stipulated. This type of bet can be doubled-up, so you’re betting that the markets will move within certain barriers.
Who uses fixed-odds trading and why?
I’ve come across traders who are a bit “sniffy” about fixed-odds, because (to put it bluntly) this type of trading doesn’t offer the jaw-dropping headlines that you can get with spread betting.
I’ve also seen the very same traders, overstretch themselves with spread betting, take some nasty knocks and wipe out their trading accounts.
What fixed odds offers traders is a slow-and-steady approach to trading, where risk is tightly controlled, and – most importantly – you can see your risks very clearly, and won’t be tempted by leverage.
Fixed odds is a good route for a cautious trader – and, let’s face it, these are times for cautious trading.
Fixed-odds bets can also be very useful ways of hedging the other trading that you’re doing. For example, if the trading strategy you’re using relies on an instrument being range-bound or you’re waiting on a breakout signal – you can give yourself some security with a relatively low-cost fixed-odds bet.
Fixed odds trades are a good way to protect yourself in today’s volatile markets. And they take away the fear of having your stop loss hit.
Until next time,