The Profitable Spread Better

Advice from the Pros

A profitable stock market trader is normally the one that concentrates far more on managing losses rather than consistently looking for winners. Fabrizio Memon, sales and marketing director of Delta Index, says the first thing their tuturials do is show investors how much of their portfolio they are willing to risk. ‘If I have €10,000, and I am risking 5 per cent on one trade, I look at the chart to see how far down the stop loss needs to be,’ Memon said. ‘So I’m looking at the risk, not the upside.’ A classic mistake that people make is getting too emotionally attached to a position. They don’t put in a stop loss order and they run with the losses for too long, leaving them very exposed.

Winning traders have an open mind, and are strong enough to admit when they are wrong and close out quickly. Consequently, their position is usually strong, and they stay with a winning trend until it ends. Even if you only get 4 trades out of 10 correct, by controlling risk through strict system-following, you can still win in the long run. Every trade should be the same, with the potential to be the biggest trade of the year. So you must take every signal.

Keep in mind that the nature of the predictive model used is much less important than money management and discipline – any trader worth his salt will tell you that. This business is about money management and discipline – the best traders have losing trades, not much point in winning on 8 out of 10 trades if you make on average 5 points on your winners and lose 20 on the losers! Call only half your trades right and you can still make money!

 

Another mistake is failing to capitalize on winners according to Dermot O’Donoghue, executive chairman of Delta Index. ‘Nobody calls every market right,’ he says. ‘And it can be tragic stuff to watch a person who was previously sitting on a winning position plunge into losses because they didn’t take their profits, ‘he says. ‘We advise our client on a few strategies to manage this. One of them is to put in a take profit order. This stops them from getting too greedy.’ ‘The other is to manage both their stop loss and take profit orders. If they have bet on a stock going up in price they can move their stop loss order upward to match the price as it goes up.’ ‘This means that they are guaranteed to keep a certain amount of their profits even if the price starts going down sharply.’ He recommends ongoing management of this to match the upward trajectory of the stock. ‘If you keep managing the stop loss order and changing it in line with the stock’s valuation you are in a position where you can’t lose and you are improving your profits all the time,’ he explains.

Peter Cruddas, founder of CMC Markets has this to say about the recent market turmoil. ‘We have got mixed feelings because clients are suffering, they are losing money, we are not happy with that, but it is good for business because we are seeing a lot of activity and we are hitting record numbers of trades, record profits, record turnover.’ On shares, he added: ‘People say they now see an opportunity to buy, but we are advising caution this is not the first time we have seen this type of volatility.’ ‘There is money to be made,’ Cruddas said. ‘You just have to be sensible.’

Of those who tend to lose when spread betting, most do so because they carry on with a losing bet, hoping their fortunes will turn around. If they are losing, they will lose £10, £20, £50 and they will keep losing under they have lost £100 – they don’t get out early enough. This type of holding on to a bet that has been made is caused by belief perseverance – a concept in behavioural finance which dictates that market players, once they have formed an opinion , cling to it too tightly and for too long. The reasons behind this are the fear of losing money and the greed involved in trying to recoup the position. The same applies on the upside. Behavioural finance dictates that traders in general don’t hang on to positions that are going up for long enough. This is a result of plain old fear that it will stop going up. People tend to take profit when the stock, index, whatever they might be trading, still has a way to go.

Offer someone a choice of £50 or, on the flip of a coin, the possibility of winning £100 or nothing. The chances are that the person will go for the sure thing. Offer a choice of a sure loss of £50 or, on a flip of a coin, a loss of £100 or nothing. The personal will probably take the coin toss. In absolute expectancy terms the scenarios offered are exactly the same. There is no benefit in choosing one over the other in the long term; yet people tend to go for the coin toss to save them from loss. People tend to view the possibility of recouping a loss as more important than the possibility of greater gain.

Losses versus Gains

The key to successful CFD trading or spread betting is to be consistent in your approach. You have to be able to recognise what went wrong and act quickly to do something about it. Know how to use risk management tools like stop losses. It is amazing how you can tell people repeatedly to be consistent in their approach to trading, but how few stick to their game plan. If they double their money they want to triple it, then quadruple it. Sounds like the same logic thousands of roulette players adopt every day in casinos around the country.

And lastly, but not least do open at least two spread betting accounts so that if you have problems with one you can hedge off with the other, if you really NEED to get out. This way if for some reason you get stuck in a position you can effectively cancel out the contract on the other spread betting company whilst the problem is being resolved.

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