#1… There Are Big Risks!
Avoid The Common Trading MistakesOne of the most important things for any trader is to learn from common trading mistakes and try to avoid them:
More Spread Betting TipsMost investors have a set of rules to guide their trading. Here are some of the more common spread betting tips:
Develop a Trading PlanIt is always important to have a trading strategy. Planning which markets you are going to trade, setting achievable goals and understanding how much money you are willing to risk can often help you make more informed decisions.
Example Plans and Trading Thoughts
We talk through, in detail, a number of trades (and “no trades”) here:
Trade the Markets You KnowTry to trade the markets and sectors that you are familiar with. If you have little experience of the commodities markets but have a good appreciation for the UK equities markets then you should be better off spread betting on UK shares
Try a Demo AccountIt is often worth trying a spread betting practice account (also called a Demo Account). These are free accounts with virtual funds.
If you are less familiar with financial spread betting, or perhaps you would like to test your theories on specific markets, then some practice may help you understand the risks and rewards as well as the various types of trading order, market volatility etc.
See – guide to demo spread betting accounts.
Or… you can sign up for a free Demo Account with spread betting companies like Financial Spreads.
Don’t Trade Too Many MarketsTry not to trade too many markets and positions at once, it can be difficult to judge your overall risk. Naturally, making intelligent, informed decisions on a large number of concurrent spread bets can be problematic, particularly in volatile markets.
Know Your Limits and Using Stop Loss OrdersAs part of your trading strategy, you might have considered the amount of capital that you are willing to risk on each trade.
Adding Stop Loss orders to your trades can help ensure that a trade is closed if it reaches the level you specified for the Stop Loss. This helps you stay within your pre-determined risk limits.
Also, note that not all Stop Losses are guaranteed.
Deal with Your EmotionsIt can help to acknowledge that you won’t turn a profit on every trade.
It can also help to accept that after you lose a spread bet you might be tempted to ‘chase your losses’ ie place some poorly researched spread bets in order to recoup your capital. These new trades are more likely to lead to further losses.
Managing Your Spread Betting Capital: Stake SizesSandy Jadeja, a well known industry analyst, believes traders can benefit from recognising their knowledge is limited. “When you know that you don’t know everything, you will remain open to opportunities, stay flexible to adjust your position if necessary and never risk everything on the one trade that you believe will be the mother of all trades.”
One area in which traders do need to recognise their limits is capital. The most successful traders are bank managers first and traders second. They chip away at the markets to make regular small profits, rather than staking everything in the hope of making one giant return.
Some trading experts believe you should not risk more than 3% of your funds on a single spread bet or CFD trade. This means if you had £5,000 in your trading account, a single trade should never cost you more than £150.
Only you know if this particular approach is appropriate for you, but having an idea of exactly how much you are happy to lose on a trade can be invaluable. After all, the fewer decisions you have to make in the heat of the moment while on the trading platform, the better.
Tips for When You Are WinningOne of things I often discuss with other spread bettors is what to do when they are winning.
The question is often accompanied by an element of surprise. Yes, financial spread betting can catch out the unwary but there are lots of ways to reduce your trading risk these days like using:
- Stop Losses or Guaranteed Stop Losses. These help close bets that are going wrong
- Smaller Stakes. You can trade $1 or £1 per point on the FTSE, Dow Jones etc
- Limit Orders. These help close your bet when you are winning and have reached a profit level you are happy with
- Live Charts. These provide historical as well as up-to-the-minute trading trends
That clearly depends upon a lot of factors and as the adverts say, you should consult an independent financial adviser when necessary.
However I can point out a few things to watch out for. You might be a Star Trader. You might not. Either way most spread bets are a two horse race and you win or lose. With any such set of events, like tossing a coin, if you do it long enough you will hit a series of wins.
You may also have had a good few losing streaks along on the way.
Some of your ‘wins’ will come through luck. In the past, despite thorough research, I have sometimes benefited from external market factors like New Analyst Recommendations, Directors Buying Shares, Increased Dividends, Takeover Rumour etc.
All of these things and many other factors can help produce a winning sequence of trades. A lot of these things can also help convince you that you are, indeed, a Star Trader. However you hit your winning sequence try to ignore your ego and remember how you got there.
After a bit of luck, you will often be tempted to:
- Increase your stake size
- Not use stop losses
- Trade more frequently
- Trade markets you are less familiar with
- Trade after less research
One of the most common errors is increasing your stake size (coupled with less research).
You may accept that you are increasing your risk but you are also changing other variables eg how you trade. Most investors trade best when they are calm and rational. Or at least rational. If you increase your stake sizes you can easily lose your head and alter your trading style. Probably for the worst, ie closing winning bets too quickly and trading losing bets for too long.
Less research will only exacerbate any irrational trading behaviour due to a lack of information.
Also, whatever you do after your winning streak, do not forget to put some funds to one side for when your trading is going less well.
In summary, enjoy your winnings, keep your head, plan any changes and do not try to give your money back to the spread betting companies as quickly as you can.
Reducing Your Drawdowni.e. “don’t spend your time making money and then just give it back”
Below, a fairly obvious 7 minute video but the principles are valid.
info If your performance is poor – take a break!
info If the market conditions change – reassess!
More Investment TipsAlso see Where Did Warren Buffett Advise His Wife to Put Her Money?
Remember: Spread betting, CFDs and forex trading carry a high level of risk. You can lose more than your initial investment. These products are not suitable for all investors. Only speculate with money that you can afford to lose. Make sure you fully understand the risks involved and seek independent financial advice where necessary.