Silly Mistakes Spread Traders Make

In this section we look at some common and expensive errors traders make spread betting and at ways to avoid them…

Here is the text from a friend who spread bets and is in love with FWY (a stock). The note distresses me as he has 3 kids and has put most of his savings into FWY at much higher prices than today -:

“Hi, good to hear from you, catch up soon for a fry up, my treat.
Christ, I forgot you were a BB addict, freak show or what.
No I kept my Fwy, thinking about averaging down 🙂

Yes I half thought about selling up a few months ago, isn’t hindsight a lovely thing.
Good news is that I have a bit in cash and looking to start bottom fishing when I can stop.
myself from falling asleep as soon as I sit down in the evening.
Catch up soon.

Now the only thing missing in this text is Pete blaming FWY’s fall on a treeshake 😉 If Pete really followed his ‘hunches’, I think it might be appropriate for that fry-up to be on me 😉 Oh dear, indeed. So many of the mistakes we traders/investors love to make:

  1. Talking about ‘averaging down’ – the classic mistake of adding to a losing position, rather than dumping it and finding a share in an uptrend instead.
  2. ‘Half-thinking’ about selling. To succeed in this game, you need to engage as close to 100% of one’s mental processes as possible!
  3. Talking about ‘bottom fishing’. I’m sure there’s an Ancient Chinese Proverb somewhere about what happens to traders who try and pick bottoms, but it’s probably too coarse to reproduce here 😉
  4. And Pete is “in love” with FWY. Probably the worst mistake of all, and is probably at least partly responsible for 1-3.

Lessons to all newbies in spread betting

Start small…

New traders to spread betting are strongly advised to bet small sizes to start with, learn the ropes and understand that psychology will play a part in your trading process. Then, once you feel confident in the knowledge and application increase your bet size. It is harder than it looks and way too many people blow out because they start off too big, lose a lot and then get carried out before they had time to learn. Many experienced traders have made the mistake of betting large amounts to begin with (in relation to their account size) and then wishing that they started off their speculative careers in a much more controlled fashion (tip by David Robertson).

It’s only £50 a point

I spend a lot of time warning people to understand that they are staking spreadbetting – they don’t work out their exposure and think “It’s only £50 a point” instead of thinking “that’s £50,000 exposure”. It is so easy to lose big with spreadbetting. And stop losses unless guaranteed don’t help. You could have a stop of 58 on SportingBet but it something new dire happens and it opens at 20p, it won’t make any difference. And guaranteed stops cost!

I cannot stress this sufficiently. It is very important to remember what your exposure is. For instance a £10 per point spreadbet on the FTSE may not seem like a lot when you’re thinking that you are only looking for a couple of points movement, however all it takes is for the FTSE to move 40 – 50 points in the wrong way and you are down £400 – £500. Basically don’t get greedy, always work out how much you are exposed to and set stop loss orders and stick to them, there’s always ‘another trade, another day’ – it is just too easy to get emotionally attached thinking ‘this is going to be the big one!’ – It doesn’t happen often. Small profits here and there is the way forward.

Aye. Many spreadbetters do forget to do the basic calculation -:

E= S x P

Exposure(£) = Stake(£) x Price(p)

Don’t forget, if you open a trade by ‘selling’, your stop order should be to ‘buy’ not ‘sell’ again…

Classic cock-up yesterday. Went short of FTSE at 6194. Set a tight stop at 6200. Oh Well, 6 points lost never mind.
Came home to see my account in very bad shape 40 odd points down.
Don’t forget, if you open a trade by ‘selling’, your stop order should be to ‘buy’ not ‘sell’ again…. 🙁
On a similar note, went long on MKS yesterday but didn’t set a stop. Was going to pull out when it fell 8 points below entry which would normally be more than enough to frighten me off. Luckily, (for once in my bleeding life) I held on.
Feeling a lot better this morning 😉

Leverage kills…

A very important mail about the misuse and dangers of leverage from Laurent. I thank him for writing it because it is a chilling warning of what can happen if you over extend yourself on credit from the spreadbetting firms. The mail really needs no other comment from me except you should read it!

Thought I would write in to tell about my 2007 thunder loss. I thought I would tell it cause you could post it on the website and it could help other people. Also, because I’ve told my girlfriend most of what happened but not all.

At the turn of this year my portfolio was up 30%. I was buying real shares with my own money and I was doing well. Although I had been interested in shares for 3 years I had only really been trading for 1 full year. I learnt about spreadbetting in Jan this year and decided that if I could make 30% on my current portfolio then when I leveraged it using spreadbetting I could …yeah you a millionare by August 2007! Or something like that.

So I started trading large amounts. At the time I didn’t really think much of it and I was just trading. Looking back at it, it all made sense. I was trading amounts that were 5 times what real money I owned. Before, when I was trading normal shares I could take a 10% loss and hold it because I knew it would come back up. Now, with leveraged shares I would step into a 5% loss and freak out cause of the amount. Basically as of June I was in the negative because even a small loss on these large amounts of money (large amounts of money for me) I would get scared and sell. I was losing almost every time I went for a big highly leveraged trade. Because I thought I was going to be rich so quickly my rules were very loose also. My stop rules and targets had become so loose it just wasn’t funny. I would have a profit of 12% but decide that it should be 20%. The share would later turn and I would sell at a loss of – 7%. Enough 7% losses on leveraged trades and your bank balance soon goes.

After going over my past trades and losing all of my capital and going into negative (I had a loan) I realized the only time I made money was on the smaller trades I did because going into a 5% loss didn’t scare me, and I could hold onto the trade if I thought it was going back up. So for the last month I have been trading smaller amounts which me and my bank account can handle. I’m now breaking even again and I am amazed at how I have been making money with smaller trades that I can handle. You read it everywhere that leverage can be dangerous and I learnt the hardest way. In the last month I’ve been taking 7% – 15% on my trades and doing much better. I’m only 26 and hope to be a full time trader one day. Until that time I’ll keep trading within my limits and hope to get there one day.

Don’t fall in the trap of having too big a bet and too small a spread…

One of the biggest mistakes I kept making when I started spread betting was by having too big a bet and too small a spread. Anyone playing this game please learn its not just about trying to make money, its also about trying not to lose money. For instance at one time in December I tried a £25 bet with a 20 point stop loss on Urals energy @ £2.79, luckily I couldn’t do this so tried a £12.50 bet with a 40 point spread.

The shares dropped to £2.46 approximately which would have made my original bet lose. As it was because I had dropped the amount and increased the stop loss my bet was still running and recovered shortly after. By april/may it was well in profit and in one week alone increased by over £1.50 to £5.60 area which I sold for a very handsome profit.

Don’t overtrade in frequency or size

This is the most common reason for traders’ lack of success. Remember that for a spread better, not trading is an active trading decision. This should be the default approach when you realise you don’t have the expertise or knowledge to commit funds to a position. To control risk, it is useful to set up a ‘stop-loss’ limit, which will close your trade at a set level if the price moves against you. Otherwise, you could be facing unlimited losses if the market turns.

Do not try to be Jack of all trades!

The choice of trading instruments can be bewildering to most people and beginners in futures especially… One minute it’s Corn, the next it’s the Wall Street, then Gold and then its March British Airways – it is best to specialise in one or two markets and get to know them inside out. The spread betting providers don’t help much either of course – too much choice just leads to disaster!! Like trying to make TOO MUCH money – TOO QUICKLY usually leads to disaster.. !!

Greg Secker: “When I first started trading, I made all the mistakes, I didn’t trade size, I didn’t plan, my strategies were ineffective and I didn’t goal set. In fact, it’s a wonder I ever made it in trading looking back at the earlier mistakes. If I took a losing trade, in my darker moments I would ask ‘Why am I doing this? Who am I kidding?!’ and without defining my goals, I remember answering that question with ‘I have no idea!?’ – And then I would take a few weeks out to ‘heal’ or at least try and forget.”

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