Malcolm. Pryor, author of the Financial Spread Betting Handbook
Sally has had a spread betting account for more than a year and has made a reasonable start at it. She works as a computer programmer and although she has a demanding job she is able to monitor her bets at fairly regular intervals during the day. Jane is an accounts clerk who has several spread betting accounts and is now making almost as much out of spread betting as she does from her accounts job.
They both enter the same two bets on 8 Feb 2007: short Rank at 265p (£19 per point) and short Morrison at 187p (£26 per point), with the equivalent of approximately £5000 on each bet.
Jane places automated stop losses on the 2 trades at 277p and 1923p respectively; and has initial profit targets for both bets at a ratio of 2:1 to her risk, i.e. at 241p for Rank [265 – (2 x 277-265)] and 175p for Morrison [187 – (2 x 193 -187)].
Sally prefers to monitor her bets during the day without an automated stop, but agrees that 277p and 193p are indeed about the right levels for stops.
The Rank bet doesn’t do too well initially: at one point getting up to 276p, but not enough to trigger Jane’s stop or to cause Sally to get out. On the 14th trading day of the bet they find they are breakeven for the first time at one point in the day, and on the 15th trading day the bet goes slightly into profit. Sally decides it’s time to exit and covers near the close at 260.5p producing a profit of £85.50 [19 x (265-260.5)]. For Jane nothing has happened yet to prompt her to close the bet. Rank declines over the next 3 days, and on this last day there is an increase in volume combined with a late recovery in the stock which suggests to Jane its time to bank profits, which have achieved her target. She covers at 238p producing a profit of £513 [19 x (265-238)].
The Morrison bet is no good at all.
Jane’s automated stop is high on day 4 and she is out for a loss of £156 [26 x (193-187)]. She has no problems with this – some you win and some you lose, so best keep the losses small and the wins big, £357 up overall on her 2 bets.
Sally on the other hand is in trouble. She didn’t exit the Morrison bet when it hits 193p and then watches anxiously at it touches 199p five days later and finally gaps up to 204p the next day on big volume. She gets out at 205.5p for a loss of £481 [26 x (205.5 – 187)]. Overall loss on her two bets £395.50.
Same two bets, yet one person wins well, the other loses. One took a big win and a small loss, the other took a small win and a big loss. Day in day out, this happens all the time with spread bettors, and the long term winners are the ones who can exit losers promptly and run their winners.
There are two costs to holding on to losers as Sally did. Obviously you lose money; but you also lose confidence and this has a knock on effect on your subsequent performance.
What’s worse than hanging on too long to a loser? Adding to it. You won’t win if you keep on adding to your losers. For example, you bought Vodafone at 130p and it’s down to 122p, so you want to buy more because it’s even cheaper?
Wrong!
You’re thinking like a value investor – not a trader. If it’s not showing a profit, don’t add to it.
In a similar vein, if you decide it’s time to cut back on your exposure, and you have three bets, two winners and one loser, most people will cash in one of the winners and hope the loser will ‘come good’. Far better to get rid of the loser, and see if the winners do even better.
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