Spread bettor makes almost £40,000 per year, tax free! (or does he?)

How many of you new and even not-so-new spread bettors would give up your day job if you could earn £40,000 per year, tax free? Most of you, I reckon, and here I prove that it can be done! But don’t trust me just yet 😉

Anyway, here is my proof. In the following bona fide P&L Breakdown report provided by IG Index you can see that on 25 July 2012 I banked almost £160 worth of profits in a single day. Multiply by 20 working days in a month and 12 months in a year, and you get to an annual on-target earnings (OTE) of £38,400. And because it’s in a spread betting account, it’s tax-free*! * in the UK, though tax laws can change

160 Pounds
Easy, isn’t it. But of course — I’m kidding you, and I’m kidding myself, which is what most spread bettors do all the time.

How I’m Kidding Myself

Most new spread bettors, and some not-so-new ones perform a false extrapolation along these lines. They take one good day and think to themselves, “Hey, if I can make £160 like this every day then I can make almost £40,000 per year!”. In this example, I’m falling into the exact same trap, and conveniently forgetting the fact that I don’t bank this much profit every single day (but of course I will from now on).

How I’m Kidding You

I’m currently editing a new book about investing psychology, which makes the point about novice investors tending to flatter themselves by banking reasonable but modest profits (like I just did) while letting their losers run to ever greater losses (so as not to admit defeat). The fact is, I haven’t shown you the current “paper” profits or losses on the positions that I didn’t close today.

I also didn’t show you the profits or losses on the trades I closed yesterday, and I didn’t tell you that today’s profitable trades were longer-term position trades that actually took longer than a day to come to fruition. In the expanded IG Index P&L Breakdown report below, see how these trades ran for up to two-and-and-half months from when they were Opened. A £160 profit over a couple of months isn’t so great if you’ve just given up the day job.

160 Pounds

Why Am I telling You This?

I’m telling you this to emphasise the fact that we spread bettors and other traders tend to kid ourselves all the time; it’s human nature. We extrapolate the good results and fail to extrapolate the bad.

What’s worse is that purveyors of trading systems (especially automated ones) and even mutual funds try to kid us by presenting subsets of flattering results for specific time periods without telling us the whole story. Admit it — based on my sensationalist headline that “Spread bettor makes almost £40,000 per year, tax free!” and my initial proof in the first table, you would have given up the day job and bought my automated trading system for a couple of grand, wouldn’t you? Lucky for you, then, that I don’t really have one to sell.

The Bottom Line

The bottom line is…
  • Stop kidding yourself about how rich you will get very soon by spread betting.
  • Stop letting others kid you that they have the secret short cut.

It is possible to make money in the short term, and over time, by Better Spread Betting; otherwise I wouldn’t be doing it. But don’t kid yourself!

Disclaimer: this posting is for general education only; it is not trading advice.