Why do so many Spread Bettors Lose Money?

Q. I have recently started spread betting having spent months studying the subject but I have already lost £300 within 1 week!

I have recently started spread betting having spent months studying the subject. I started with £300 and within 1 week had lost the whole lot! My best position was £5 in profit. The rest just ran at losses even though I studied the charts for ages.

This is how I lost my money. I would look at FTSE 100 shares that had crossed their 40 day moving averages. Then I would look at the MACD to confirm the movement in that direction. I would then look at the candlestick chart for confirmation and also a guide to where to put the stop loss. Then the trade was placed and hey presto, it goes the other way and I lose!! Any thoughts on this and my useless chart analysis method?

I am concerned about putting more money into this without knowing if it really is as good as the companies say. I read on msn a recent survey of the spread betting firms that said 90% of traders lost their money and that companies such as IG Index are seeing massive growth in their profits. Is there anybody out there actually making money spread betting?

A: £300 isn't enough to get you started in my opinion; I think a lot of people try trading without doing adequate research and preparation. As the saying goes - fail to prepare, prepare to fail. There are most probably more losers than winners, but what's most important to you should be how you're doing.

Losing £300 isn't really proof that your system doesn't work. Nor is losing 9 times out of 10 proof that a system doesn't work. In fact that might be a great strategy. Lose 9 x £1000 and make 1 x £20,000. Often you'll find it's not about win/loss ratio rather how much you lose when wrong but how much make when right.

The only way to lose the game is to get knocked out. But there are many ways of making a profit, as long as you have preserved some capital to do it with. You need to develop a plan, back-test it, modify it, back-test it more, then maybe paper-trade it to either destruction or profit: if it's profitable, trade the plan with tiny stakes (because the game changes when you put real money in), then ramp up your stakes until you're making a decent income.

Your analysis method is not useless. The important thing is you have a method and although it is not working it's a question of tweaking it and trying to improve on it which I am sure you will do in time. I would suggest tweaking your method on a demo account. After 10 years of trading I still use a demo account to try out different methods first to see how effective it is.

In a nutshell -:
  1. Did you backtest the method over a period of time to see if it was profitable?
  2. Did you forward test the method on paper to gain confidence in it?
  3. Are you trading with money you can afford to lose?
  4. Are you trading for excitement or taking it seriously as a business?
  5. Have you looked at methods freely available on this website and elsewhere on the net?
  6. Are you prepared to commit loads of time to learning to trade?
P.S. Yes, you can make money spreadbetting shares, just don't try and scalp...

I humbly offer some basic Rules of Trading for your consideration.

The Trade

  1. Trade with the trend - no trend, no trade
  2. Plan the trade, trade the plan

The Entry

  1. Wait for the signal
  2. When the signal comes, don't wait
  3. A weak signal is still a signal
  4. Trade what you see, not what you think

The Exit

  1. Never let the profit go back into the market

The Stop-Loss

  1. Set a stop-loss on the entry
  2. Always obey the stop-loss
  3. Don't wait for the stop to be hit, close or cut losers early

The Sins of Trading

  1. Money Management - most of the newcomers fail in this regard, you should risk only a small percentage amount of your overall pot at any one time
  2. Trading against the trend
  3. Trading without a stop-loss

The Rules of Trading will keep you alive, the Sins of Trading can kill you. Don't give up.

Why do some many Traders Lose Money Spread Betting?

  1. Not understading of the very basics of investment or how to read a balance sheet
  2. A gambling mentality
  3. Gearing up to ridiculous levels
  4. Very short term view
  5. Many buying on tips etc trying to make a quick killing rather than doing any substantial research.

All in all, very easy to see why most people lose money from spreadbetting. The main problem with spread betting is that it will find any weakness in the psychology/discipline department and this is why it's a difficult area to crack consistently, iron discipline needed. Combine this with spread betting attracting new people to the markets and you've got your 80% lose stats. The main thing people MUST realise when they spreadbet is that there will be an apprenticeship to serve. Use small bets until you have a system that works for you!

Trade what you see and NOT what you hope...
You only need good luck if you don't have a good system. If you have a good system then all you need is patience.

Q. Why do most investors lose money?

A: The reason most traders lose money is because they buy price not value. Calling the price right is merely guesswork, and ordinarily guesswork does not reap rewards. The exception to the rule merely serves to prove the rule.

The fact is if your analysis suggests that the valuation is below that which your calculations suggest, you ought to buy it, and vice versa. If your analysis is correct, at some stage the valuation will come out. The markets are not efficient, otherwise valuation inconsistencies would not appear. The markets, especially in the short term, are just the views of collective sentiment, and willing buyers and sellers determine the outcome or price. Over a sustained period, willing buyers and sellers adjust to the underlying valuation, or so one hopes. It is obvious, however, and as Buffett famously said, the markets can stay irrational for a lot longer than the investor can stay solvent. Therein lies the beauty of the inefficiency of the markets, and that which leads to the opportunities in the first place.

The reason investors can get it wrong is because the initial analysis is flawed. This may be due to factor that the investor was not able to predict in terms of outlook (for example, several years ago investors may not have anticipated a consumer slowdown and thus when assessing a retailer may not have factor that into their assessment and so forth).

Ascribing a valuation to a company is not an exact science since it is based on interpretation of facts, and an opinion of outlook and market forces going forward. Getting it right requires considerable skill, plenty of experience, tremendous judgement and an ability to sort out the wheat from the chaff...

Q. Why do so many spread bettors lose money?

A: Why is it that 80% or more punters can't make this work?

Understanding leverage is where a lot of spread bettors fail - well that and greed! If your spread bet is geared 10x, then just bet the equivalent of 1/10 of what you would normally invest in a stock dealing account. And don't forget to use stop loss orders with margin products like spread betting and CFDs!

I would hazard a guess that a significant number of spreadbetters lose money because they treat it more like betting than like investing or trading - i.e. opening positions in the same way that they might place a bet on a horse, just because they fancy it might do well, and moving on to another the next week (or even the next day!). And many others lose because they treat spread betting like trading but they haven't developed the trading skills and discipline that is needed to make a success of trading.

Also, at the risk, metaphorically, of teaching my grandmother to suck eggs (although why she would want to do so is beyond me) one of the main 'operational' reason that people lose money on spread bets is that they set their stops too close to their buying price and are taken out at a loss (and unlike holding the shares, that means your capital is gone - you can't recover it if the price rises) only to see the trend they bought into resume and sail past their entry point after they've been stopped out.

Secondly I think that many spread-betters often over-bet, ie don't have enough spare margin to ride out downturns, so they get closed out at market bottoms even if their stock selection would in the long term beat 2-3% a year. In fact, one of the biggest problems is that a lot of people are attracted to spread betting as a means of 'getting rich quickly' or of 'making a quick buck' - and this can't be further from the truth - about 80% of day traders get wiped out by losing 100% of their trading capital..

Another thing that has stuck in my memory from those accounts is a few comments by the people concerned that they'd traded quite a bit more than they'd intended, and that they felt the user interface / environment provided by the spreadbetting firms somehow encouraged this... And certainly if I were someone unscrupulous in charge of a spreadbetting firm, I would regard trying to deploy psychological encouragement to trade more and a bit of obfuscation about the level of the charges without actually lying about them as a far safer way to proceed than to try to "in some way fiddle the numbers to fraudulently reduce client balances". For instance one of my spread betting brokers will phone me up if I haven't placed a trade for a few months and ask if everything is OK, can they improve services etc. All very friendly and helpful but with a pretty clear (to me) agenda!

To be successful you need to get quite a few things right including betting on the correct market direction, getting your timing right and choosing the right sized bet - due to the way margin trading works you stand to suffer large losses if you get any of these three factors wrong. Opening and closing positions frequently is perfectly OK for a disciplined and experienced trader but not for the average investor. Also, spread-betters often choose small cap shares which have much higher spreads than 0.5%.

Prudent and experienced traders understand that often the best way to operate in markets that offer gearing is to be in it for the long run. They understand that the outcome of any individual trade is not so important, what matters is a series of trades taken as a whole over a period of time which can lead to amazing results.


A Cherokee elder sitting with his grandchildren told them, "In every life there is a terrible fight -- a fight between two wolves.

One Wolf is evil: he is fear, anger, envy, greed, arrogance, self-pity, resentment and deceit.

The other Wolf is good: joy, serenity, humility, confidence, generosity, truth, gentleness, and compassion."

A child asked, "Grandfather, which wolf will win?"

The elder looked him in the eye. "The one you feed."


 ...Continues here - Addiction and why so many Index Traders end up Losers

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