Tips for Spreadbetters from Fellow Spreadbetters
Spread Betting Risks - Disasters to Avoid -:
Spread betting is like every other form of gambling, there are do's and don'ts. Here are some pitfalls to avoid....
- Over confidence. Get over confident in a bet and you may lose the ability to think rationally. This may cause you to bet more than you should and do yourself some financial harm.
- Emotional betting. Bet with logic, not your heart. Resist the urge to have bets on teams or markets you like, instead bet on what the prices and stats say. Also, do not enter trades based purely on fantastic news!! Basically, again you get emotional, spot an opportunity to make some ‘easy’ money and jump in without any plan. No idea of where to exit to take profits or where to place your stop.
- Failure to stick to a staking system. A staking system tells you how much you should bet on each event and gives you a maximum loss for each set period of time. Failure to stick to this could result in you "chasing" and losing money.
- Impatience. Great bets do not come up every day or week. Sometimes you will have to bide your time and wait for an opportunity to present itself. Better to have one great spread bet than 5 bad ones.
- Over-leverage - The first thing any trader learns along the painful journey of trading is not to get too highly leveraged in the first place. £100 a point is just a ridiculous amount of leverage if you only have £10,000 or so in your bank. It's this ‘greed for cash’ that is more akin to gambling than trading and how many gamblers win long term...not many.
The thing is if you have £10,000 in your bank and you buy the FTSE 100 at £100 a point, and by some chance you guess correctly and it goes up 50 points you sell having made £5,000. The next day you do the same at 200 a point and so on...it only takes one black day when you guess the market wrong and you're wiped out.
Some time ago I was at a 'free seminar' sponsored by CMC, and their guy told an amusing anecdote about some muppet who'd blown up in a big way, and he added parenthetically that they were still pursuing him through the courts to reclaim the full extent of the losses he incurred (i.e. above and beyond his deposit/margin with them).
- Watching a stock (penny share) rise by 40% in one day, and getting greedy and holding and consequently watching it (over the course of 2 weeks) drift back down to BELOW the original level. Why didn't I sell after the first day?? In a word... Greed. Why didn't I sell during the next 2 weeks? Simply because I ‘believed’ it would continue to rise. Why? Because everyone on a forum felt it would go north further, and I wanted it to!!! How stupid!!!!
- Adding to a losing trade (by averaging down which is the opposite of pyramiding). For example: Buy at say 50p, price drops to 40p so instead of letting a stop loss kick in, I instead bought MORE at a ‘bargain’ price, only then to watch it slide further south.
- Overtrading is another mistake. Spread Betting can be addictive and suck you in. It gets to a point where people just haveto trade every day on something or other. For most people if you trying to trade more than about 1-2 times a week you might need to ask yourself why. It’s best to trade only when you see a ‘sure thing’ with a relatively small chance of being wrong. These kinds of trades don't come along every day.
- Another prized mistake is holding on to your losing position hoping and praying the market will turn. Best to plan your trade before getting in and setting a stoploss. Even people who don't like setting stops with shares need to think seriously about doing this when using leverage or you could get mauled. Top traders can make good money by only making money on half their trades, or even less. The secret is to cut your losers quickly and limit losses while letting your winners run. Spread Betting is for the short term so if your position moves against you immediately and keeps going away from you, admit you got it wrong and shut it down. Short term trades are for short term considerations. If you put on a position and it keeps losing day after day that should tell you something.
- A common error is oversized positions. It’s best not to commit more than 3-5% on a single idea depending on your confidence and the perceived sweetness of the trade. I mean 3-5% of an idea not each company. One error among people who think they have diversified is to risk say 5% of capital on each of Xstrata, BHP Billiton, Rio Tinto, Anglo American, Lonmin, Vedanta and all the rest. If the forces driving up this lot fail they all go down together. A lot of people have bet most of their money on oils/metals shares failing to see the correlated positions and have come unstuck in a big way. It’s not too much different to taking an oversized position in just one of your favourites. Remember, you're in this game for the long haul, so don't feel you have to make big bets to make it worthwhile. Better to keep things small and successful, than overextend yourself. Small points over time lead to big prizes.
- Naked greed is a real killer and the reason for overtrading and oversized positions. People want to use their leverage to get rich quick. Sure, you can risk something crazy like a third of your capital on a trade and get it right in a big way and make a ton of money in no time. There were people who habitually shorted in 2000-2002 and pyramided outsized positions and turned a few tens of thousands into over a million pounds. Many lost it later. If you trade with outsized positions you will get wiped out quickly. If you are fortunate and get some big wins due to the strategy the day of reckoning is postponed. Sooner or later you will lose big if your position sizes are mad. Be patient.
- As a trader don't try and rationalise the market - the market can stay irrational longer than you can stay solvent. Trade what you see not what you think. Last Thursday I waited until after the BOE decision to enter a trade to the short side - even though I’m a trader by profession and know what a hike in rates should mean, I am not arrogant enough to say I can judge short term sentiment.
- Some fools trade with credit...well these are Darwin award gold medalists in my view.
- Do not believe the idiots bragging about £10k trades per point on the daily FTSE...they are fooling nobody...especially if they are relatively unknown.
- And remember 'trading is tough tough'...if it was easy everyone would be doing it….the multitude of spreadbetting companies out there should prove that it’s a successful business model...
- All those tips are INVALUABLE but most of you will still not take any notice because you have to 'feel' the pain to learn. We tend to follow a pattern of making the same mistakes in life so if you can stop them and learn from them the profits should then follow.
I was on a business trip earlier in the year and I was sat on the plane close to a guy that worked for one of the large spread betting firms who was off to start a branch of their business there. He was explaining how they operated to the guy sitting next to him and I found it quite fascinating from the perspective of someone who uses spread bets.
Basically he was saying that the business was incredibly simple. You had the vast majority of punters who lost money and a very small minority of punters who made money. As someone was identified as being a 'winner' they elevated them to a special list and fully hedged their positions. The interesting thing he was saying though was that the reason the others tended to lose over time wasn't that they consistently chose bad stocks, it was merely a psychology thing. People tend to run loses then close them out after they reached large levels. People tended to either cut gains quickly for small profits or tended to gear into gains - so that when the price trend changed they quickly gave back all their profits.
We been broken down
They slipped me again, I couldn't get out
it went the wrong way, the news was leaked out
the broker is bent, the prices are wrong
they took all my rent, I'm short - it went long
Its not down to me, its me that they shaft
it isn't my fault, the brokers? - they laughed
when i took the trade I knew I was right
but didn't realize that my broker was shytte
I am a good trader, I know what to do
but my money is gone now - like crap down a loo
I know that I'm right - I'm right all the time
Its the brokers who screw me, now I don't have a dime.
Next week will be better, I'll know what to do
I'll go the right way next time, my broker is new
If I can just get and win a few days
I'll be back on top with my superior ways.
And here I am now, ready and able
I'm long in the market, lots of cash on the table
Its going my way, I cannot fail
but oh no, it's turning (I begin to wail)
It looked like a long - the news was all good
but it's going down, my guts feel like mud
I took the chance and its starting to rain
and I know it's those Bustards brokers again!
>> Page 3 - Tips for spreadbetters from Vince Stanzione