YTE’s Ben Power speaks to technical analyst and educator Malcolm Pryor – who talks CFDs, spread betting, trading strategies, and what it takes to make a successful trader.

In recent years, many traders have turned to over-the-counter products such as CFDs, and, in the United Kingdom, spread betting, attracted by leverage and the huge range of markets the products provide (and in the United Kingdom, their tax-free status). However, traders face unique challenges using these products, not least the fact that trades are not conducted on exchanges, which can potentially trigger conflicts of interest.

Malcolm Pryor is a private trader, investor and educator who, with his books, DVDs and seminars, is helping traders work through the complexities of trading over-the-counter products. His best-selling book, ‘The Financial Spread Betting Handbook’, is now in its second edition. Pryor also publishes the websites www.spreadbettingcentral.co.uk and www.sparkdales.co.uk. 

Pryor entered trading through investing and taking control of his retirement funds. He started learning about technical analysis, which led to day trading. In trading, he saw frequent opportunities and a potentially high annual return.

While Pryor’s writing and education focus on spread betting, like most successful traders his success is based on universal principles. He is focussed on finding genuine trading edges through continuous research and learning, which helps him weather difficult markets like the current market. Pryor employs strict risk management, cutting losses and optimising bet sizes for each trade, and he works hard on the psychological issues of trading.

He spoke with YTE’s Ben Power about the opportunities and pitfalls in spread betting, his trading strategies, and what makes a successful trader.

Why did you focus on spread betting?
Leverage, and the ability to trade many instruments – futures, FX indices, stocks and interest rates – all in the same account. Another benefit is that, currently, most UK citizens pay no tax on spread-betting profits.

What are the major differences between spread betting, which is particularly popular in the UK, and CFDs, which are big in such countries as Australia?
For most UK citizens, under current tax laws there is no tax to pay on spread-betting profits, whereas CFD profits are taxable. In many respects they are very similar products; and CFD traders come to my seminars.

We have recently seen CFD and spread-bet traders’ funds frozen when the broker MF Global (formerly Man Financial) went into receivership. How does a trader choose a spread-betting firm and try to avoid these risks?
Counter-party risk assessment should be part of a trader’s account selection (though I doubt many people could have foreseen MF Global’s difficulties).

Secondly, people with significant trading funds should have multiple accounts to spread the risk. In addition, traders should have predefined limits to total exposure that take into account the risk of being stuck in a trade beyond the usual time. There are many reasons this can happen in addition to counter-party issues – for instance personal illness, or accident.

What do you mean by counter-party risk assessment?
Assessing the financial integrity of the firms you use for trading – for example, size, balance sheet, cash flow, and so on. Unfortunately, MF Global would have passed most people’s tests.
One problem often found with spread betting (and CFDs) is that you are effectively trading against the house.

The main question here is how much the spread betting and CFD firms hedge the customers’ positions (because if they do not, they win if you lose). The answer is complex: it varies by firm, ranging from a lot of hedging, to not much (with the firm banking on 80 per cent or more of customers making the wrong calls). In addition, the total book is to some extent self-hedging, with customer longs and shorts netting off...

Excerpted from an article originally published in the Jan/Feb 2012 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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