Fear and how it Grips You

Guest contribution by Dom Davis who has recently tried his hand at spread betting follows -:

Despite the name, spread betting isn’t quite gambling. A reasonable strategy and good risk management will make you money. Let’s assume your strategy wins 40% of the time. That’s losing on 6 out of 10 trades. You will risk an amount, £X and try to make £2X. Over 10 trades, on average, you’ll lose £6X (you’ve lost 6 times) and win £8X (you’ve won 2X 4 times). That’s a profit of £2X. X also wants to be about 2% of your total trading capital so you can lose up to 50 times in a row before being out completely.

When I started I started small. I was betting 10p per point with trades being placed for minutes rather than hours or days. The way spread betting works you’re automatically down when you enter a trade. With EUR/USD I’d be down 2 points, or 20p before anything had happened. I’d set my trade up so if it went another 28 points in the wrong direction to get me out of the trade. This would lose me £3 tops.

Quite often (in fact most of the time) the trade would go the wrong way to start with. I’d often see my 20p loss grow to £1 or £1.50 before it headed in the right direction again. Eventually it would break even, then start making a profit. More often than not the profit would then start to get eroded, sometimes heading back to break even, or maybe even a small loss, before moving to greater profit. So my bet would start at -20p, move to -£1.50, head to £0, go on to £1, head back to £0, go on to £3, back to £1, then to £5, back to £4, on to £7 and so on and so forth. My goal here is £6 since I’ve risked £3.

The way I worked would be to change the trade when it got to £2 or £3 in profit so that my trade would automatically be closed if it went back to break even. I’m now risk free. Each time it gains £1 in profit I move the point where it would automatically get closed by £1. Sometimes I would think that it couldn’t go up any more, cash in, and be happy. Other times I’d ride it as far as I could and have the trade closed by the automatic stop. Doing this I could make £15 or more in a trade which is much more than my target. Quite often I’d get two of those in a row netting me £30 in a day. Sometimes I’d have a bad day, but it was only £6 down. The problem was, even with making 3 or 4 times my risked X, with things averaged out I was only making £9-£12 per 10 trades which was 3-5 days worth of trading. I needed to scale up and that’s where things started going wrong.

I scaled up by 100 times. Instead of 10p per point I traded £10. That’s £300 risked with my strategy, and a gain of £600 every 10 trades assuming everything goes as planned.

So the trade is on. I’m automatically down 2 spots so I’m at -£20. Things go the wrong way to start off with so could go to £100 or £150 down before moving back towards break even. Despite the trade going in exactly the same way as before physically, psychologically I’m panicking. £150 is a lot of money. As it heads to £0 my nerve breaks and I close out the trade as soon as it starts turning a positive profit, possibly just a fraction of a point, netting me £3/£5 or £8. That’s all well and good but if I make a loosing trade I’m £300 down and I need to make 60 winning trades at £5 per trade to make it up. That kind of winning doesn’t happen.

Even when I could hold the course and watch the profits rise I need to be banking £600 minimum. I watch the profits rise to £100, then it reverses and heads towards £0 again. With the smaller stake I take this in my stride and sit tight because I’m pretty sure it’ll go back up again. Now I’m watching my £100 become £90… £80… £70… will it stop or will it keep going to -£300? My nerve breaks, I bail at £50. Sounds like a good profit, but I still need to make 6 winning trades for every losing trade to break even and that isn’t going to happen.

No matter what I tried I couldn’t get passed the fear of losing vast sums of money when the bigger amounts were in play. I’d even do trades on two accounts, one at £10 per point, one at 10p per point. I’d bail with the £10 account, let the 10p run and watch as it made me £6, £10, £15. That’s £600, £1000, £1500 IF I’d let the £10 account run.

So you get yourself worked up. YOU ABSOLUTELY WILL NOT INTERFERE WITH THE TRADE. You set it up so it’s completely automatic. You’ll walk away with a £300 loss of a £600 gain. Nothing else is allowed. Problem is there is a 60% chance you’re going to walk away with the loss (possibly more so as you’re worked up and not thinking about things as rationally as perhaps you should). I did it a few times and each time I lost. I’d not done enough trades to see my 40% wins, was down hundreds and doubt has now kicked in. I started second guessing my trades, deliberating too much, waiting too long and entering trades too late, resulting in more losses. You have to remember that 6 losses in a row still doesn’t mean your system isn’t working and means you’ve lost £1,800. You could make that back and more in your next 4 trades. But then again you might not.

So there is my problem. I can make money with spread betting, quite easily. I just can’t make very much. As soon as the numbers get to any appreciable value (much more than 50p per spot) I freeze, make mistakes or just bail too early. The Fear just gets in the way. unfortunately the trading system I use is very subjective. I can automate getting out of the trade once it’s on but there is no way to automate entering the trade. If I could work out how to do that I’d make a fortune.

As it was my spread betting experience has left me roughly breaking even. My small gains over a few months were wiped out by a few bigger losses as I ramped things up. I’ve withdrawn most of the money from my trading account now, but there’s still some in there because I do still enjoy trying to diving the vagueries of the financial markets.

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