The 9 Mistakes of Spread Betting
Financial spread betting takes no prisoners. Get involved unprepared, and you can quickly burn through your funds. Here’s, we’ll look at the 8 most common spread betting mistakes. Avoid them, and you’ll be well on your way to a successful financial spread betting career.
Mistake #1 – Not having an edge
When you’re making a new bet, always ask yourself:
“What’s my edge?”
If you don’t know, you probably don’t have one.
Having an edge is important in spread betting. With an edge on your side, a reasonable volume of bets should result in a profit. In later topics we’ll be looking at strategies that can give you an edge – like well timed entries, exits, combined with good risk management. (There’s even a great edge to be found in knowing when not to bet!)
Before each bet, get into the habit of speaking your edge aloud. If you have trouble, reconsider that bet!
Mistake #2 – Not planning
People who think spread betting is just mindless gambling are always surprised when I tell them how much goes into planing.
Plans come in many guises. Traders who profit from spread betting will usually have an overall annual plan, plus a detailed short-term plan (for instance, a game plan for the next week.) They’ll also prepare detailed plans for the next day.
Most people who decide to have a go at spread betting rely heavily on ‘tips’. They haven’t devised their own method of making bets, so they devour tips from magazines, newspapers, websites, and people they meet in the pub.
If you’re looking for tips, you’ll find no shortage. The trouble is, using these you’re essentially just taking a punt.
Most people’s ‘tips’ only suggest an entry. What about your exit strategy? Your money management, and your risk management? Most people never get beyond the stage where they trade on other people’s tips. These people are never winners.
Mistake #3 – Betting the wrong amount
So you know when you’re going to enter a bet, and you know when you’re going to exit. Not so fast – you still need to decide how much to bet!
This is important, because you’ll have losing trades as well as wining trades.
Tom is relatively new to spread betting. He decided to open an account with a spread betting firm after reading about spread betting in the newspaper. He spent a few weeks trading for fun using Capital Spreads’ demo account, and eventually became confident enough to fund his real money account with £1,000.
With the credit crunch in full swing, Tom has become bearish on the banking sector – in particular Barclays. The firm recently slumped to a record low after one City’s analyst advised clients to sell, and Tom believes the share has further to fall.
The stock is currently trading at 240p, and Tom opens the bet online first thing in the morning at 240p for £25 per point. He reckons the stock should drop to 190p, making him a profit of £1,000. That day is busy at work, so it’s late afternoon before Tom gets the chance to log into his spread betting account and see how things are going.
Unfortunately, Barclays has rallied, and is up to 265p, losing him £625. He receives an email from his spread betting firm explaining that he needs to fund his account with more money if he wants to keep his bet open. He’s lost just over 62% of his initial bankroll. He decides to cut his losses and close the bet. Over the next week, Barclaysdoes indeed drop to 190p as Tom predicted, but it’s too late for Tom – who has already lost money on the bet.
What went wrong?
Tom didn’t decide in advance the point at which he’d decide that he was wrong. He only considered the upside of his bet. Spread betting is an ‘edge’ game. Even when you make consistently sound betting decisions, you’ll still have a lot of trades go against you.
Secondly, Tom’s bet was obscenely large considering the funds in his account.
As a rule of thumb, the amount you stand to lose if you’re wrong shouldn’t exceed 2% of your account. Had Tom been more sensible, he’d have decided when was going to exit the bet. Suppose that point was if Barclays moved from 190p to 210p – a move of 20p. Since 2% of Tom’s account is £20, in fact he could only afford a £1 per point on this bet.
What you’ve just read is a good example of a phenomenon known as overtrading. Overtrading comes in several forms, but it usually results in a trader going bust. Take risks, but play within your limits!
Mistake #4 – Not using basic risk management.
The example above showed you an example of betting without having an exit plan. Few things are more certain to lose you money!
Before any bet is made, you must decide where you’ll enter the bet, where you’ll exit if you lose money, how much to bet, and what your profit target will be. Spread betting is about managing the downside just as much as the upside. It’s a sad secret of spread betting that many people go head-first into it without giving any thought to the downside. Anybody can deal with a few nice wins, but how you cope with losing trades is what dictates whether you’ll be a winner in the long run.
Risk management means having pre-defined exit points for all your bets. If you’re going to win at spread betting, you can’t ignore this.
Mistake #5 – Bailing at the wrong time
People think that winning at spread betting is just about knowing when to enter a trade. True, timing is important. But for most traders, knowing when to exit is more important.
Many traders could significantly improve their numbers if they spent as much time planning exits as entries.
Mistake #6 – Being out of control!
When you place a bet, you don’t know what will happen. You might win. You might lose. You might break even.
That’s the nature of the beast. But if you have an edge, then over the long term your betting will have a positive expectancy. Any one bet could be a loser, but we play the odds and let the edge play itself out.
Losers tend not to be in control.
Mistake #7 – Being out of tune with the markets
As I write this we’re in the middle of a bear market. But do you know what the majority of bets place with online trading accounts are? Long. That’s right – the overwhelming majority of customers are still betting on stocks going UP when the markets are heading DOWN.
I’m not saying that you can’t take a contrarian position on where the markets are moving. But there’s a high chance that many of these folk aren’t even aware that you can bet on prices falling (e.g. shorting).
There are studies going back to the 1930 that show most people have a bias to the long side. Why? If the market’s going down we want to be mainly short, and if the market’s going up we want to be mainly long. Simple! Many spread bettors lost money from 2001 to early 2003 because they didn’t adjust their approach – they were still mainly placing long bets when the overall trend was down.
Mistake #8 – Running before you can walk
Your friend tells you that he’s taking a course in electrics over the weekend, and setting himself up as an electrician the following weel. Firstly, you wouldn’t believe him. Secondly, there’s no way you’d let him rewire your home. But plenty of people come into spread betting expecting to be able to pick it up over a weekend and start banking huge profits straight away.
You might be thinking the comparison is unfair. It takes time and skill to become a qualified electrician, whereas spread betting is easy. Anyone can do it! The truth is that while it doesn’t take as long to learn spread betting, it does take time to learn to consistantly win at spread betting.
You need an edge that works for you, and you need to learn how to work it – with real money. If you don’t take things slowly, you can lose a lot of money fast. The majority, perhaps the vast majority, lose money in their first year at spread betting. It’s best to assume that will include you, unless you progress steadily and keep your bet sizes low while you’re still learning.
Mistake #9 – Being emotionally unstable.
Spread betting can be a rough ride at times. In your day job you can have a bad day and still get paid. In trading, you can do everything right and lose money.
If the thought of this sounds crushing, too much to cope with, then there’s a good chance that spread betting might not be for you. If you have an edge then you’ll win in the long run, but even then losing days will be part and parcel of the job. You need emotional stability to endure that. A quality not everybody has.
What’s Your Greatest Weakness as a Trader?
It is quite important for spread traders to be aware of the risks as well as the rewards when placing trades. I know our spread trading strengths and weaknesses change over time as we attempt to develop our strengths and tackle our weaknesses, but even so at any particular moment in time there are usually certain things that we are trying to improve.
The title of this post is somewhat misleading as instead of discussing our weaknesses we should put more emphasis on highlighting our past weaknesses and how we worked to overcome that. Knowing your weakness is your strength, but doing nothing about the known weakness is a worse weakness.
My biggest learning over these 3 years: Don’t overtrade, technical analysis does help tremendously to time entry/exit, don’t get emotionally attached to your shares, and don’t follow anyone advice when it comes to picking shares or timing entry/exits- just do your own homework!
When I first started I knew how to execute a trade, but nothing about trading psychology, risk and money management or about building a robust trading plan, or the discipline required to maintain it. Unfortunately these things aren’t very exciting, but they’re crucial to being a successful trader
In my own case I believe one of the flaws at the present time is that sometimes I’m still guilty of overtrading and not sticking to my own rules.
Here are some other common spread trader weaknesses -:
- Not Understanding Leverage. Undertstanding the true value of your trades means that you are able to manage your downside risk. Wtih spread trading you only need to deposit a small percentage to gain a substantial exposure and this means that your ROI is magnified, but this cuts both ways.
- Not following your own conviction with the consequence that you constantly get shaken out of good trades due to fear.
- Overtrading is very common if you don’t really watch it. Some tend to follow a cycle of building their spread betting account for months only to give a hefty chunk back to the market.
- Not keeping a good written trading log. Keeping good logs of trades is essential.
- Entering trades just to prove to oneself that you can trade any market conditions! The consequence of this is that you again break your own rules and techniques so you won’t be able to maintain your edge. Your trading system will only work in certain market conditions.
- Not having a Trading Plan. You need a trading plan and trading strategy with clear profit targets and exit points to take emotion out of the equation. This will help you manage trades (minimising losses and locking in profits) while avoiding the temptation to take out profits early or letting losses run for too long.
- Don’t let emotion get in the way of successful spread betting. How do you overcome emotion? Understand your tendencies and personality traits so you can combat your weaknesses and maximise your strengths more effectively. Stick with your strategy. When you have a losing trade, don’t go all-in to try to make it all back in one shot. It’s smarter to make it back a little at a time rather than being stuck with two crippling losses.
- Not Knowing the Market. Make sure you understand the market you are trading and what makes it move. For instance, you should know that Gold normally moves in inverse proportion to the Dollar and that the price of gold affects mining shares.
- Not Following the News. While charts and technical analysis help to profit future price movements based on price patterns, fundamentals events and news releases can have a big say as well.
Note: Knowing your inner strengths and weaknesses will also give you an insight of how you will react in a given situation such as in stressful market conditions when a spread trade may be going against you. This will help you recognise areas where you need to improve. Keep a trading record of all your trades and do go over them once in a while. Given time you may start identifying common recurring patterns when you are in a profitable trade versus a losing trade. You will then be able to analyse your results properly – identifying strengths and building on your weaknesses which will ultimately help you become a better trader and build on your long term trading success.
Day trading is hard. A thousand different traders all with a different system + a thousand different black boxes all with different setups. Nothing can possibly work all the time and its quite likely that about 50% of things will only work 50% of the time. That’s the mathematical probability of it. It is very frustrating and time consuming waiting for trades to come to you, so you go off searching for them and things start going wrong because you get emotional about it and start doing what you shouldn’t do. It can be done but don’t think it is easy. I read a blog the other day about a Pontoon (blackjack) player who won overall. His only system is that he had learnt the mathematical probability of winning or losing from each number he was holding. If he was holding say 18pts he knew that the bank has a smaller probability than him of making 19-21. He also knew the 50% probability number where he should hold or twist for an additional card.
You want to succeed? Have a good understanding of your trading objectives; why you want to trade, what you want to accomplish. Lastly, study yourself. Understand about your personality, time available, strength and weaknesses.
I received the following comment from a spread trader -:
‘I have banked the remaining money and will not spread bet until I really know what I am doing. I mean. I could do this FTSE intraday trading – spotting the trend lines and the supports…etc, with a tight stop and small bet sizes, say £10pp, but it is very risky still. And I am so down on the balance now, that its hardly worth starting again. I should really stick to betting only when I know the odds are heavily in my favour – and the FTSE100 is so prone to dive or rise on news that the investments houses find out about way before we as punters can – by the time we find something out, the market has moved against us. It is gambling, no two ways about it.’
You are probably betting too large a stake? You should have tried £1 per point. Logical decision making and clear thinking somehow become much more apparent with smaller stakes. As I’ve stated here many times before, when I used to trade larger stakes I constantly lost money – you don’t realise it, but emotions subconsciously affect your decision making. Once I was sitting in a large stake trade and could feel my heart pounding through my chest. I think that was a big part of the realisation that emotions were taking over.
The most common spread betting mistakes that new spread betters tent to make when they start include the following:
- Trading without any kind of edge or proven positive expectancy trading system.
- Trading against the wider market trend (for instance, taking long positions in Barclays when banking stocks in general are under pressure).
- Trading without a trading plan and without trading objectives.
- Using an inappropriate bet size (for instance, betting £10 a point on the FTSE 100 with an account of just £2000.