Addiction and why so many Index Traders end up Losers

Q. Why do so many FTSE spreadbetters lose money?

I'm new to spread betting and know the basics, today was my first day trading and had a big loss. I would like advice on which way the FTSE will move tomorrow. Also any other tips you might have would help me a lot.

A: There are only three things that you need to master:-
  1. Capital management
  2. Exit strategy
  3. Entry strategy

After that it is a piece of cake. The order might seem weird but IMHO it is not.

Seems easy huh!? Well, it's not. I am afraid you have an awful lot to learn. Some may say, don't trade a penny until you've researched for a number of months. I would say start by staying really small - 0.10p - 0.50p per trade. I find you learn more by risking something. Albeit only small amounts. One lesson I have for you (apart from everyone thinking that this game is easy, and everyone getting burnt in the early days.usually badly) is to read the following article.

And as an aside very few day traders who spread bet indices on a daily basis make money. And here is why most day trading index spreadbetters lose money:

Spread on rolling FTSE is 2 points. If you open and close one trade per day of the rolling FTSE (approx 250 trading days), then you will have paid 250 * 2 = 500 points of commission/spread. That is like outperforming the market by 8% [500/Level of FTSE * 100].

Most fund managers have trouble just matching it.

And let's not forget financing charges. If a spreadbetter leaves open a position overnight for 100 days per year, he needs to outperform the market by an additional 35 points.

Personally I would like the ads that spreadbetting companies are placing on stockbrokers and other sites, where they offer sign-on bonuses, banned. They're happy to offer £100 free to new customers because they know that is peanuts compared to what most clients will lose.

My advice is to trade for the longer term. It is more prudent to spread bet on indices with time frames measured in weeks or months not hours (and I've had some modest success this way). I only trade in one direction (currently FTSE down) and trade March contracts average up and down, closing out along the way as appropriate and ask myself the question:

'Is it likely that by March my position will show a decent profit (FTSE 6000) and if it goes the other way (7000) meanwhile do I have enough margin in place to finance the position?'

The key is patience, common sense and carefully calculating and monitoring leverage.

Q. I've lost too much money day trading the FTSE...

The Indices and Oil is something I'm going to keep away from once I got rid of my FTSE positions. That's where I have lost the most money and I believe I would continue losing my money if I keep doing them. I may even close my FTSE positions at a loss if I have to just so that I can get out of them. I'm more sure of equities, and also believe my plan will work really well if followed correctly. I have also decided that I will not be shorting any equities, but just going long on them. I will be doing most of my equity buying when the FTSE has had a good battering like as in January. - Liam

A: Liam, have you traded stocks, funds or ETFs much?

Or rather how often have you been down and how did you react? One of the most difficult things with short term trading is managing your emotions, and the indexes are the hardest things you can spread bet on. If you haven't much experience trading then going straight into spread betting the Dow and FTSE is like playing a flight simulator then being put in the pilot's seat of the Shuttle. You'll have to be in the top 1% of air force pilots (with no training) to not crash and burn.

You should be so comfortable and well trained, day trading should be a boring job, if it isn't you're not good enough to make a living at it. You may think you're good enough. You can make 5 trades, 4 of them successful but the one bad one you get stopped out and you've made a loss for the day. After a couple of weeks you up the stakes with a better system and the market turns against you. Now you're a thousand down. Some bad luck and you're three grand down.

Now you're trading on fear, making irrational and costly mistakes until your account is wiped out and you're one unhappy, broke guy. Then you realise you should have listened to everybody who said day trading wasn't a good idea and you work out how long you're going to have to work to save all that money again.

Most (or all?) of the traders who make any money are professionals with years of experience. Try paper trading with ETX Capital for 6 months and see how you get on ~ the market will still be here ;-) Either that or fix a sum of money in your head that you're prepared to lose. If you lose it then close your account and put it all down to experience.

Q. Do not trade INDICES, it's just a lottery...

It's just a lottery unless you have a bottomless pit of cash you will be margined before you can say Jack Robinson, one piece of news from the Fed can move the DOW 200 pts in a nanosecond know...

A: I have to disagree with the point you make regarding indices, the volatility on the DOW is 1.07 compared to say 4.57 on DGO, 1.21 on DTY.

So therefore one can argue that the DOW is a safer trade, the mistake most make is not having the funds to trade the indices to its full potential. A 1-point spread contract on the Dow (at 12115 example figure) gives you the exposure of $121,150 without any stops (full margin) obviously there are not many players that can do that, so therefore they are at the mercy of the played stop by the company in question. I have had more stressful trades on individual companies at some time. ;)

Most traders who trade the DOW do set out to be losers but for a different reason: if you take out a position on the DOW with a 20 point stop, your expectation should be a return of 60 points (3:1 risk reward). The average intraday move of the DOW is 110 points, so how likely is that you will capture 60 of them in one move? Quite unlikely and this is why most lose.

Q. I am afraid that my wife has become addicted to spread betting. Won't talk about it... We could lose everything I do not think she understands the risks...

A: The best thing to do here is work out what your account equity is and perform a few calculations to make sure you don't risk more than 1% of this money on a single trade. Essentially, your calculations should allow you to size correctly into the market relative to your account equity and stop loss (which should be worked out relative to the volatility of what you are trading).

I know I have talked about it relative to yourself when it is actually your wife doing this, but it's important that you understand the risks if she won't listen. You mentioned that she is addicted which is worrying - the very suggestion means that she is probably gambling and not trading. A trader with a negative emotional response to the market is a very dangerous one (think Nick Leeson and, recently, Jerome Kerviel). So, yes, you could lose everything and, because of the leverage, end up in debt.

Have you noticed, while your wife is trading, any phone calls from the spreadbet firm relating to 'margin calls'? If so, you need to talk to your wife about this regardless as it means she is losing more than her initial deposit.

Try to understand that the emotions that go with losing money are a strong feeling of failure and regret. Therefore, suggest that she doesn't give up, just try with less money (you can spreadbet for 50p an index point with some firms) until she becomes profitable trading. Then increase size in steps. Sounds to me like you're going to have to take on the Risk Manager's role...

Q. I owe £9.5k on margin call from few months ago which I have no hope of repaying :-( It is now going to court...

This is the first time I've been in this position, could it be a CCJ or worse? Would legal representation help or be a further waste of money? I have already repaid £4k which went on credit cards. They would not offer a settlement figure nor would they freeze interest. And will this restrict me from spread betting in future? Any suggestions welcome. Many thanks.

A: I suspect if it went to court you will be able to make an arrangement to repay them, and the interest either frozen or wiped off. I doubt you will be able to continue spread betting under your name until its repaid though...

 ...Continues here - Attributes for Financial Spread Betting Success

Recommend this on Google

The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.