More on Mistakes and Blunders

Don’t confuse a limit with a stop order…

You have previously opened a position buying £10/point of the December FTSE at 5650. Several days after opening the position the December FTSE is trading at 5563. You place an order to close your position by selling £10/point should the December FTSE reach 5610.

Is this a Limit or a Stop?

This is a Limit.

A Limit is an instruction to deal at a more favourable level than the current price. The current price is 5563 and you are leaving an order to sell at 5610. Selling at 5610 is more favourable than selling at 5563, and so it must be a Limit.

A common mistake for people unfamiliar with Stops and Limits is to look at the opening level of the position, 5650, and to view selling at 5610 as a Stop (as it is a worse level than the
opening level). Had the order been left when the position was opened, when 5650 was the current price, then it would be a Stop. In the problem described, however, the opening
level is actually irrelevant to determining whether the order is a Limit or a Stop, as it is not the current price.

Don’t close out your bet too early…

One thing I have learnt is not to close out the bet too early as prices often bounce around. I made that mistake yesterday as I had to go out and the share was dropping fast. This morning it opened up and would have put me back in profit instead of the loss.

This is a mistake we all make at the beginning I think, its always so tempting to bank a profit and equally we panic when we see it going the wrong way, especially with spread betting. I now panic far less when my bet goes against me, because so many times in the past I closed at a loss when if I had held my nerve I would have banked a profit.

As I remember reading, the great Jesse Livermore said “It was never my thinking that made the big money for me, it always was my sitting”. Patience is an essential virtue in equities, as long as you had the correct reasons for buying in the beginning of course! Never buy on a whim, but don’t underestimate that gut feeling either on occasions if this comes from experience of focusing on a particular market for a long time.

Be careful when trying to hold a buy and sell position over a particular spread bet

I once had a spread running on Sept S&P, thought I would nick a few points by shorting the same spread for half the long bet over the next few hours. Only to find that they sold half my long position for a bloody loss…I suppose it’s there somewhere in the small print.

Now, I understand (with CMC) that if you opt to go long £10 per point, you cannot have a short position of say £5 per point running simultaneously (as this will effectively reduce your long position to £5 per point). I have, in the past had opposite trades running like that, however I use another account to do the trade, so in short it is possible but you must have 2 accounts.

Lastly, with most companies you can go long and short in different time frames example long rolling and short on say a month’s contract.

Discipline

The hardest, HARDEST, thing is discipline to stick to what I have learnt about the market, and to not trade too big on any one thing, no matter how juicy it seems at the time. A small platoon of strong soldiers will get a job done well, so that’s how I’m playing. The real live experience from Thomas below is deadly common -:

‘I’ve been spreadbetting for about 6 months, and I was doing fairly well for the first 5 and a half months, using it as a way to ‘invest’ for the medium term by going long on futures. I was doing great with RBS, especially on the morning of their results, I was up to a net balance of £1,100 after starting with £500. Unfortunately I didn’t close my positions and the share price plummeted over the next week, and I was down to only £150.

So I gave up on that and started betting on the daily FTSE, opening and closing a few positions a day. I got myself back up to £500, and thought I was doing well, until I took a little too much risk and had a really bad day which nearly wiped me out. A last throw of the dice on RBS last week and I am now totally wiped out.

I realised that I had started to think like a gambler, my losses hurt so much that I took too much risk to try to claw them back.
So I have gone back to the drawing board, I am going to try a few systems using a demo account, and make sure I have one that seems to work well for me, before I dabble again. Also, I think a few months out of the market will do me good mentally.’

The chart always has both a floor and a ceiling. The market does not…

Be wary of the the subconscious influence that the top and bottom of charts have on your trading decisions and market outlook. New traders (and maybe even experienced ones too) should be aware that in a violent up tick the price is always heading into the TOP right of your screen. In a down turn, the price is heading into the BOTTOM right of your screen. You look at the screen, see price near top (or bottom) and think (on many levels) that it will stop and reverse at that point. And you miss out on the follow through!!! The chart always has both a floor and a ceiling. The market does not.

Just love some of the forum quotes I keep encountering…

Quotes like at this price surely it is ripe for an opportunistic takeover. I read that as ‘oh dear I’ve done it again and bought high and it’s going lower please somebody bail me out for the mistake I’ve made.’ Why would any company bid whilst the company is having to go through a massive internal audit and god knows what it will throw up?

‘Markets makers having a laugh by dropping the price.’ No chance on the size of the company and the volume this is the ‘market’ that is pricing value.

‘This is cheap as chips’ Yeah and it may fall and become as cheap as buttons. Look at the chart it doesn’t paint a pretty picture. We can all come out with cliches, I’m thinking of the one ‘never catch falling knives’…etc.

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