Spread Betting Example of the German Bond
You have got into trading, and and you have a good understanding of Indices and Shares. Forex is maybe too fast for you but you have now a curiosity of trading the Bond Market. A good place to start would be our local European 10 year German Bond. Here I will give you an example of how to trade the German Bund. Further on I will show you the various products you can trade in the bond market, I will also give you a brief explanation on why you would trade the individual products.
The first thing to take in consideration when you want to trade a new market, is know the Margin (deposit), the stake you would like to spread bet and your markets Typical movement.
1) The Initial Margin Required: to know the margin, Log into your account and look for the information sign.
As you can see from the screenshot of this IG account the deposit factor is 70 x your bet. There is a Minimum bet of 2 GBP a point therefore you need a minimum deposit of £140. If you place a stop loss the initial margin is reduced by the distance between your opening price and stoploss, let’s say 25 points, times your stake. If your bet is £2 you will need a minimum deposit of £50 in this case.
2) You Spread bet stake you would like to place: Let’s say you have a 5, 000 GBP account and you decide you would like to place a maximum 2 % at risk for this trade, that is £100 not more. We will use the example of the 10 year German bond below.
The German Bund is currently trading 13903/ 5. To sell it is the lower price, 13903 and to buy it is the higher price 13905. The difference between the buy and sell price is known as the spread. The spread is your cost of trading. Spread betting companies charge a little commission on top of the market spread. In this scenario the spread is 2 points, which is quiet cheap, given they allow your to leverage your money.
Trading Long Example: So you have a hunch prices have just bounced off a support level or a pivot point and that the German Bund should not trade below 13880. At this level is where you will decide to exit if prices fall below 13880. The German Bund is currently trading at 13905. You also believe it should move back up to 13980, where you are more than happy to take profit. You have decided not to risk more than 2% of your account(£100). Therefore you decide to buy at 13905 and place your stoploss at 13880. This is a distance of 25 points. Therefore £100 / 25 point stoploss = £4 point stake.
If the Bund Moves Up to 13980 you have made 75 points (13980 – 13905 = 75) * your £2 you have made £150. If instead the prices fall back below the 13880, you will get stopped out loosing £100 the amount you decided to risk in the first place.
Trading Short Example: Instead if on the other hand you thought this is a little bounce and price will not move higher that 13950 but you believe prices will move down to 13850. Let’s do our maths again. You have decided you only want to risk £100, and the current sell price is 13903, as you feel prices will drop therefore you want to go short. The distance from the opening price to the stoploss is 48 points, therefore £100 / 48 points = just over £2. For this example we will round off the stake to £2. If prices reach your stoploss you will lose £94, if instead prices reach your target of 13850 you will profit from (13903 – 13850 = ) 53* £2 = £106.
Now that you have had these examples, there is ne more thing to consider, How many points will the bund move today?
To answer this question I will calculate the average daily movement. I have taken the High – Low and have averaged it out over the last 5 days. loot at the last column. on the 2012-01-19 prices moved 90 points, instead on the other days it moved 60 points. As you can see the average is about 70 – 80 points. this calculation gives you an Idea of what to expect from the German bund market movement in one day.
I Hope this spread betting example of the German Bund has been useful. i will later explain what moves the Bond markets and how to trade them.
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