Managing Trades and Profits

  1. One basic tip would be to never, ever, risk more money than you have the potential to make on a trade. It’s totally pointless. It should be more like risking x to make 2x, 3x, 4x, etc. This might sound unrealistic, but the best traders make money because they milk good trades for all they’re worth, usually even adding to winning positions. How are you ever going to make money if you take £100 profit as soon as you get it and sit on £300 loss, hoping it’ll turn round. So risk £100 to make £200…etc at the very least. On the subject of risk-reward and odds, there’s a quote from Buffett in the book where a friend brings him a company making a new gizmo. Buffett says ‘what odds do you give it of taking off?’, friend says ‘about one in two’, Buffett says ‘and you think one in two is good?’,’Yes’ says the friend. Buffet replies, ‘OK take a parachute that works one in two times and jump out of an aeroplane.’ Class. Money management is the most important aspect of trading, and it’s what makes you consistently profitable over time.
  2. Do not take your profits too soon – I really have to emphasize this. There’s an old investment saying that you should ‘let your profits run and your cut losses short. Unfortunately, though, many spread traders do the exact opposite. When things go against them, they move their stop-loss and go even further underwater on their position. And, at the first hint of a profit, they close their position and bank their gain. Dumb luck traders take their profits too early – they will risk 100 to get 10. Spread betting becomes dangerous if you are not absolutely rigid about risk reward ratios. You must try to take as much emotion out of trading as much as you can. One should always use stops and limit orders but these should be proper stops based on your target. It is no good having a stop 800 points away only to take 20 points. For the risk reward strategy to work, you must be willing to work on at least a 2:1 ratio, if not more.
  3. When you are about to close a winning position, ask yourself why you are closing the spread bet – some expert traders are very good at reversing bets. When you are about to close a winning position, ask yourself why you are closing the spread bet. Your decision to exit a profitable trade should always be backed by what your latest research tells you. If you use charts and the market you are short-selling is not yet oversold and there are no support levels at hand to break its fall, there is a good case for remaining in the position.
  4. Sometimes, when you go into profit you will find yourself split between letting your profits run but at the same time you don’t want to lose the profit should the market reverse direction. Here it is may be wise to take some money off the table and say, close half your position and let the other half run. Remember a profit is still a profit. It is quite irritating when you sell out and a share just keeps going, but you’ve still banked a profit. I vaguely recall someone saying something about getting rich by being ‘in too late and out too early’. I have lost count of the number of times over the last couple of years I have cashed in too early. The bruises on my forehead are ample evidence of this.
  5. Remember that a profit is not a profit until you close the position. However, you should treat a loss as a loss even if you have not closed the position, the capital is tied up and could be used in a profitable trade.
  6. If your bet is in profit move your stop to trail the share price, never be afraid of locking profit in. Moving stops to lock profits is especially useful in uncertain situations like bid approaches where it is unclear how high the price could go. In any case if your trade hits or surpasses the profit target, tightening the stop to protect profit is definitely a good idea. Ideally you would be able to move the stop loss up as the prices moves up although that’s not always possible as spread betting providers only let you place a stop within a certain percentage of the current price. Another idea would be to partly close your position so as to take some money off the table.
  7. Just like you should let your profits run you should also always grab windfall profits – i.e. if within a few hours/days of taking out a position you end up with exceptional profits (much more than you expected), don’t hesitate to close your position.
  8. Don’t be afraid to take your losses and re-enter at a later date if needed. Cutting losses may be one of the hardest things to do but you must absolutely learn to do it if you want to survive in the long run.
  9. If the reason for buying/shorting changes then close the position. Do not just hold on and hope…
  10. Resist the mindset that you must make back losses as quick as possible. This is dangerous and akin to gambling in blackjack, losing and depositing a bigger amount trying to recoup your losses. This way of thinking can only lead you to making further losses. There is no rush whatsoever. I have learn’t this lesson (the hard way). Do good research and then do some more.
  11. Be happy if you lose in the beginning. Losing money is probably the best thing that can happen to you when starting out. Many people lose via spreadbetting because they up their stakes when they start winning using leverage, get greedy and then implode. Losing teaches you far more than you can learn from winning, of course only if you learn from your mistakes. It does not matter if you only make £50 on a trade; at this stage you are gaining experience and learning how to read market action. This is another reason to start out small because if you lose £500 in two months I would assume you can handle it without too much trouble.
  12. Don’t expect to make a profit in six months, however, if you are a quick learner and already understand technical analysis pretty well, then you might break even. More importantly, you can have the best method in the world and understand technical analysis inside out, but if you can’t pull the trigger due to psychological aspects of greed of banking every small profit and fear of losing, then you will not succeed. This aspect to trading is the hardest to master. You must constantly evaluate yourself and the trades you make, i.e. complete a trade journal with reasons why you entered and exited trade.
  13. Set long term goals and don’t expect to start making money immediately. When you put undue pressure on yourself to succeed immediately which would be considered an unreasonable target, you are setting yourself up for more stress and pressure.
  14. If you have a trading strategy written up, no, not in your head, but written down, then start with a demo account. However, paper trading is futile. It will not test the demons in your head like trading with real money, so try out your strategy, get some confidence with it and move on. I would suggest 4 weeks as a minimum to paper trade.
  15. Do compliment yourself and feel good about a trade if you manage to follow your own trading plan, irrelevant if this results in a profit or loss on the trade. In fact, you shouldn’t get too excited about winning trades or too depressed on losing trades either.
  16. Check the credentials of trainers in spread betting. Do not overpay for any training course. Actually, if you’re just starting out, I would avoid spending lots of monies on a course. You can get a good foundation from a trading book. Once you have some basic knowledge you’re in a better position to proceed to the next step which is what you want to trade. Do you prefer swing trading? Is foreign exchange the right market for you, or shares? Do you intend to mainly make use of technical analysis to trade or prefer fundamentals? Is day trading what you’re into, or do you have to put up with longer time-horizons due to your 9am to 5pm job? When you are able to answer those questions you will be able to identify the trading manuals, courses or even seminars that are most likely to assist you in progressing your trading instruction. A problem that most beginners have is that they tend to jump head-on into the market without ever taking some time to learn the basic workings and figure out where they should be concentrating their attention. They hear about stock market traders making big monies swing trading the FTSE index, or something of the kind, and get captivated. Inevitably, they waste a lot of time and moonies figuring out that maybe swing trading the FTSE isn’t what they should be doing. If they’re lucky, they won’t wipe out their account before they get their trading identity sorted out.
  17. Spreadbetting is IMHO not something to get involved in when you are feeling fed-up with the markets – you must be able to trade with a minimum of distractions – don’t spread bet after a bad day at the office or after a row with your loved-one. Never play on emotion, nor after drinking. The right state of mind is essential to spreadbet. You have to be a cold, clinical, detached, riverboat gambler to win at spreadbetting. Making decisions when you are tired, feeling anxious or fearful is likely to cost you money. If you are feeling in the least fragile (or euphoric) stay away from the table!
  18. Some firms like Ayondo allow you to practice, without risking any money, on simulators…open one and do it for a few weeks at least but be aware that it will be very different once real dosh is involved though. The greatest problem, will be, believe me, restraining yourself. And if you go on to open a live account they also permit you to run small sized bets and strictly control the leverage, but they save the best advice until the very last – know why you’re trading. Do not trade simply for fun. Do not trade because you are bored and do not trade for fear of missing out.
  19. One thing I would say to anyone who sees spreadbetting as being a quicker way to play on a bigger scale than by tying up cash. It is. But you do need to be already good at choosing what to trade and when. Spreadbetting will magnify your existing performance. If that performance is poor your losses will likewise be faster and bigger (!).
  20. Spread-betting profits are free of capital gains tax, but this will not effect the majority of punters. The tax advantage may disappear if the trader derives his or her whole income from spread betting.
  21. Arbitrage is sometimes possible, but you will need accounts with several spread betting firms, and to be quick off the mark.
  22. And lastly, if there is anything that you don’t understand about the way your bookmaker operates, ASK.

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