Overtrading your Account

  1. Don’t over-stretch – leave plenty of headroom on the account for adverse price movements in the underlying share. I would say that one should never really gear up more than say double the value of your equity. Whereas in reality it’s easy to end up geared 3,4,5 or more times with spread betting accounts. 5 times gearing will mean your entire equity is wiped out if the price moves 20% against you!
  2. Do not over-extend your account when some profits emerge, i.e. to constantly over-trade and use profits to act as stakes for new positions. You need to run the account with a good surplus at all times so that you can just absorb a down period in the market (and believe they will come!) without having to exit positions to meet margin calls. Ignore this and you might end up selling good, cheap shares in order to fund margin calls, only to see that in most cases you might have picked winners, but sold them off for the wrong reason at the wrong time.
  3. As you see your portfolio increase in value then you can start building new positions. Always try to have a balance in your portfolio, try not to trade in shares in the same sector as you could see volatile movements.

  4. It is also a good idea to diversify to lower your overall risk to avoid big losses. This means opening spread bet positions over a variety of equities and sectors so that no individual losing trade has the potential to affect your overall trading account in a big way. Spread betting allows for very small positions so it is quite possible to open several spreadbets in a number of different markets even on a limited amount of capital. For instance, if you had all your investments in the retail sector and there was a sharp drop in consumer spending all your positions would suffer losses. But, if you had mining, retail and pharmaceutical stocks, for example your would be less exposed to losses. What is important here is that the spreadbets are not held in markets that are too closely correlated. If you want to further minimise risk you can hold a portfolio of both long and short spread bets as this creates negative correlation.
  5. Remember spread betting can be a very useful investment vehicle in the right hands however it is very easy to over-leverage and then say buy 1 million quid of copper . Needless to say this can quickly lead to doing a Nick Leeson (who brought about the collapse of Barings Bank!) on a personal financial level. One thing that I have found really helpful in imposing the whole discipline and not getting too carried away thing is to build a spreadsheet that shows me the exposure I have if I had actually bought that amount of stock/commodity. Every decimal point increases by a factor of 10 the amount you have bought, lets say BP is at 6.49, if I buy £1 a point that’s equivalent to £649 worth of BP shares, if I buy Gold at 549.5 that’s equivalent to buying £5495 of physical metal, taking copper as an example if I buy that at 2.1234 that’s an equivalent exposure of buying over £20k worth of the stuff. By structuring my bets as a portfolio of shares, metals and indexes I can see what point, synthetic exposure, and funding costs I am committed to in total. If I feel uncomfortable with the amount of equivalent exposure I just cut back my position, or increase it as the case may be. I also believe that thinking in these portfolio and real terms helps to prevent the terrible urge to over trade that you will feel as you see those numbers ticking up and down.
  6. Spread Betting can be addictive and suck you in. It is very easy to get caught opening positions that aren’t great because you want to be involved – it’s the gambler mentality that keeps you wanting to be in the game. Must admit that one of my failings was always wanting to be in the game – I fell for this and lost a couple of grand a number of years ago, I am now more than willing to sit on the sidelines. In fact sometimes I feel that spread betting is easier to do if it is a banned site at work. Prevents a lot of overtrading 😉   So in general be wary of over trading – remember what a spread betting provider wants from a client is churn i.e. lots and lots of trading which is exactly what you want to avoid. They don’t really want you to hold long term buy and hold investors – SpreadEx were remarkably honest about this in a seminar, and is yet another reason why I suspect they did not tune their pitch correctly to their audience. Most people over trade and trade too much too early on. This probably summed up best by our friend Mr Warren Buffett ‘the stock market is simply a method of wealth transferred from the impatient to the patient’ (the wording may be slightly different, but a great quote and a true one).
  7. Don’t feel like you have to trade every day – learn to read the signs in your market, certain times of the day/month may offer better market opportunities than others. In fact you don’t have to trade every day or even every week or month to make a very good living as a trader. You only have to make a few good trades when the opportunities present themselves. A favourite quote of mine reminding me that as a trader it is never a good idea to chase a trade or chase after the price action is the following: ‘It’s better to be out of the market wishing you were in, than to be in the market wishing you were out’. This is another way of saying ‘Missed opportunities are made up easier than trading losses’. In trading and financial spread betting, patience is most definitely a virtue and you will be rewarded if you keep yourself disciplined and focused on your trading plan.
  8. Likewise taking breaks from trading every now and then is a good idea especially after a losing patch as it helps your mind stay lucid – so take two steps back, close your losing positions and look at your trades again after a few days. If can’t get yourself to stop trading, then try trading smaller sized positions with less frequency. How do you cope with stress and anxiety? My advice for any trader would be in the first place get some fresh air and exercise, in the second drink no tea/coffee (try hot Ribena) for a few days a week; and make sure you eat well (fresh vegetables, good fruit of juices, fish, meat once a week). A good digestion and lots of oxygen might help to reduce anxiety. Give that a few weeks and then maybe try CBT (Cognitive Behavioural Therapy). I know nothing of it except a bit about Ultrasis as an investment a few years back but I’m told CBT can be handy.
  9. Some people use spreadbetting for very short term movements and only hold for a few days, others, like myself, have tried to build longer term positions, buying far-dated contracts, six or nine months out. It’s all down to your own trading style rather than a set of rules. For instance I have held Soco spreadbets for more than 2 years and rolled over SIA for quite a number of quarters as part of my holding. I am refering only to individual share bets, not to index positions. That’s a different game altogether…
  10. Do learn the mechanics of selling short – with spread betting you can make money even when a market goes down and it is important to understand that markets often fall 3 times as fast than they rise meaning you can make quicker profits by short selling.
  11. Never invest in any company which is not profitable (unless, of course you want to short it ). You should only buy stocks which are showing relative strength and have a consistent record of increasing profits and dividends.
  12. You can also place option-based bets as an indirect way to trade options.
  13. The sky is blue and the future is rosy. Be careful as you can easily get carried away, you find yourself with a stock that looks way undervalued, that’s in an uptrend, and you think to yourself; If I use ten percent gearing I can tenfold my money in a couple of months. Shares do not go up in straight lines; even the fastest risers retrace at points, and you can find having had some decent gains, that they are wiped out along with your initial investment in a couple of very bad depressing days! Which is again a warning on overgearing really!!
  14. Margin Calls – always take the call, don’t turn the phone off. This is especially important if the margin call is big. Sometimes I need time to work out what money needs shuffling where, and how long it will take to move, so I call back after working out an action plan. When you have a big margin call, you need to have a credible plan for dealing with it – just asking for more time in the hope that the market goes your way is not an option usually. If you can’t meet your margin calls (demands for more cash to fuel losing bets), then you can be closed out of a position immediately.
  15. Also, do watch out for margin rate changes (another reason why you don’t want to be over-leveraged). For example, I know of a trader friend whose margin ratio for one of his small caps tripled from 25% to 75%, which forced him to cough up £40k within days. If you can’t meet this call, expect to be stopped out without mercy.
  16. Only promise what you can deliver and always do what you say you’re going to do. This carries a lot of weight with the spread betting companies after a while, if you build a reputation of being someone who is good to their word then you’re more likely to be looked after in difficult times. Except with MF Global Spreads, who don’t seem to give a monkey’s about anyone other than themselves. Normally you need to find the cash within a couple of days, but I’ve been able to negotiate longer periods (up to 2 weeks) by honestly saying where the money was coming from (e.g. T+10 settlements) & then delivering on what I promised. If you tell any lies about funds coming in, etc, then expect to be closed out and unceremoniously dumped as a client. It’s always best to manage the situation, and if you’re in the merde, then face up to it and deal with it. Communication and honesty are the key.
  17. Learn all about the effects that inflation, interest rates and taxes can have on your chosen shares. Good management will have made provision for the factors that it can not control such as those named above; poor management will get slaughtered if there is a sudden and substantial increase in any of them.
  18. I don’t have any holy grail to offer you. I don’t believe in holy grails, but I do believe in trading a system that gives you an edge in every trade. My advice is to stack the odds in your favour by trading with the trend, not against it. Doesn’t work every time. But it works more often than not, and puts you into trades that sometimes turn out to be huge winners that reap hundreds of percent profit. Whatever you decide on stick with it and refine it, don’t jump from one ‘system’ to another, shares go up and shares go down, even good shares go down.
  19. Make sure to do plenty of research on your trading costs – in spread betting this is mainly the bid offer spread which adds up in the long term as you have to pay the spread each time you open a bet. In fact this is probably one of the main reasons why so many short-term traders fail. This is critical. Ayondo (our spread betting provider of choice), for instance offers some of the very competitive spreads around.
  20. I reiterate that each of us must decide our own time-frame and risk-profile and what is right for one does not have to be right for the other. But if you are holding or looking to top up or exit then it helps to understand what’s going on in the mind of the trader.
  21. Focus on an Entry and Exit point as this is very important – study the approaches of WHEN to buy or sell, purely to minimise your exposure to risk. Check yourself constantly and make sure that you are moving forward and getting smarter with your entry and exit points. Relying on pure luck is futile.
  22. There is ‘no’ express route to trading successfully. Spread trading is like trying to fly a Boeing 747: if you don’t understand the weather conditions that can affect you (i.e the market), and don’t understand the controls (i.e your strategy) and don’t know where the escape exits are (i.e stop losses) then you will eventually CRASH AND BURN! There is no substitute for doing your own hard laborious research, …back test …back test, and back test …even more! Profitable trading is not just about making a trade, it’s also about knowing when not to trade. It sound obvious, but how many times have you opened a position becauseit looked ‘right’ only for it to go against you? Do you even know why the market went against you? Note, for every trade you lose, you’re down the spread (e.g. 2pts) plus your stop-loss e.g. 5pts) = 7pts. You’d better have a winning strategy! Otherwise each time you loose you’ll have to win back 7pts x stake just to break even!
  23. Stay away from a static market i.e. when prices are moving very slowly or not at all. Some markets are more liable to become static than others, and a small price rise in one kind of market may actually be a giant step in another, hence the importance of getting to know the market in which you wish to trade and how much it has moved over time. For example, in the Daily FTSE a stagnant market is usually one where no movement occurs on a particular day, or perhaps no more than 10 points in any one day. Either way, a stagnant market is not a good time to begin a trade if you are inexperienced. It is extremely difficult to predict how and even which way they will move. It is usually better to delay your trading until there are movements one way or another.
  24. If your strategy is ‘truly’ sound you should be able to easily turn £10,000 into £20,000 with minimal/controlled losses.
  25. If your strategy cannot be put down on paper in a clear procedural form, indicating stop losses, good/bad market conditions, signals, patterns etc, then it is flawed!.
  26. If you find yourself consistently losing chunks of your £10,000 then your strategy is flawed! Change it, or give up.
  27. If you find yourself opening positions out of ‘greed’ then your strategy is flawed.
  28. If you find yourself closing positions out of ‘fear’ then your strategy is flawed.
  29. If you find your self seeking holy-grail advice on how to trade profitably then you don’t even have a strategy!
  30. Don’t trade because it looks easier than working for a living (it isn’t). And don’t spread bet because there is a free bet offer to claim!
  31. Most who trade with spread betting firms lose money, but the winners make very high gains. If you have researched and analyzed and tried different techniques of money management or ways to trade example: range trading or getting in on breakouts, or trend following, or averaging down or up, a portfolio of companies or indexes, long or short and you’ve been disciplined and nothing is working for you then you have proved that spread betting is not for you.
  32. Don’t take it too seriously. It’s only money at the end of the day. Always good to remember when you have a losing patch that despite what seems like pain there’s a lot worse things in life than losing money and being miserable. And if you think I am mad for saying this then you shouldn’t be trading with money you cannot afford to lose. So again never trade with money you can’t afford to lose. Use a pot of money of which you could tolerate a 50% loss. Understand the risks.
  33. If you keep losing money, you might as well move on – there are plenty of other ways to make money when you put effort in that don’t involve trading. If you decide to come back to trading in a few months/years, you’ll probably have a clearer frame of mind and have a better chance of making money. In my experience, unless you can really somehow pull yourself together, the stress of losing is only going to make things worse…

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