Hold a position for too long and its value could drop unexpectedly. Sell too quickly and you could miss out on performance.
But new data from a leading spread betting firm suggests traders are more worried about the former: they are keeping daily FTSE 100 positions open for a maximum of only two hours, in the belief that the strong UK equity market rally has come to an end.
The research from City Index shows that even though index trades are generally less volatile than individual share trades, and can even be opened using quarterly contracts, traders are cutting down the length of time they keep their bets open, as price movements are becoming less predictable.
Joshua Raymond, market strategist at City Index, says: “One of the key influencing factors behind this is that the FTSE 100 has become much more volatile since the turn of the year, with typical daily trading ranges of more than 100 points.
“This has only exacerbated since the start of the sovereign debt crisis.”
However, there is a benefit to betters in the increased level of volatility.
Mr Raymond points out that the increased volatility has also meant that spread betters no longer need to wait as long to reach their profit or loss targets.
“Moreover, increased volatility has made markets a little more unpredictable, making spread betters more reluctant to maintain positions for a longer duration, leading them to cash in early rather than risk losing gains or escalating losses.
“This could have played a role in the contraction of average deal lifespans.”
Others point out that the time a trade is held can depend on the type of bet that is placed.
Tim Hughes, managing director of IG Index, says: “It’s worth highlighting the difference between a spreadbet and a contract for difference in this regard.
“We find that spread bets – offered through IG Index – have a more speculative outlook, while CFDs – offered through IG Markets – are more often used for hedging.
“As such there can be a vast discrepancy between the average length of time a spread bet position is held open versus a CFD.
“Typically a FTSE 100 spreadbet will be open for just a few hours whereas the CFD equivalent will have an average duration measured in days.”
It also depends on the asset class on which traders are betting.
“Sectors such as commodities have a been a lot more stable than equities and in these areas people tend to take a longer view,” says Gary Thomson, director of sales trading from Worldspreads.
“We expect to see more stability across all areas after the emergency Budget. But until then, we expect more and more people will become shorter term traders.”
The other factor is cost. City Index has found that, since reducing its spreads across key markets, it has seen further changes to customers’ spread betting behaviour.
“Recently, we reduced our spread for our FTSE, Wall Street, Germany 30 and France 40 Index daily markets to one point,” says Mr Raymond.
“As a result, we have seen an uplift of approximately 40 per cent in average client trading volume and a 50 per cent increase in stake sizes, while the average life span of deals continues to contract.”
He puts this down to the fact that, as the spreads are now much cheaper across these markets, they need to move only one point before a spread better’s position is in profit, when previously the move had to be greater – such as two points on the FTSE and four points on Wall Street.
IG Index has also recently reduced its FTSE 100 spread down to just one point, which has encouraged shorter trade durations but again this is a reflection of the fact that a trade can turn profitable faster than was previously the case with a two point spread.
“The days of extended rallies look to be behind us, at least for the time being,” says Mr Hughes.
He continues: “The shifting landscape regarding regulation, sovereign debt and the prospects of a global economic recovery will continue to lend uncertainty to markets.
“The subsequent increase in volatility means traders will have the potential to reach their target prices faster, but the risk of quick and unexpected reversions is again going to discourage clients from holding out in the hope of making another 10 per cent profit.”
But no matter the cost, there will always be two types of trader, says Chris Hossain at ODL Securities, recently aquired by FXCM.
“The adventurous trader will ride out storms over longer periods, but the more risk-averse are looking to trade on smaller time scales and take advantage of news stories,” he says.
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