More Trading Tips, Tactics and Strategies
1.) Keep a diary
Best advice I can offer to fellow spread betters – keep a diary. Record all trading numbers including gains/losses to-date, closed and open positions, winners/losers, win/loss ratio, biggest win/loss and number of successive winning and losing trades. And don’t record just your trades but more importantly, why you did them. Record your feelings, e.g “I bl**dy knew I should have closed that when I was up 10 points”, issues you might be facing in life on that particular day…etc. Review the diary regularly and remember that this is for you to reference so be honest with yourself. And every once in a while ask yourself: ‘Am I getting any better at doing what I know I should do, especially closing out losing trades when they aren’t hurting too much yet?’ Analysing your results is important as it will allow you to learn from your mistakes and improve your overall success rate.
The important thing here is to benchmark yourself against an index and keeping records also helps so you’re not kidding yourself you’re making money if you’re not (as it is very easy to get an addictive booze from trading spreads!). Also, odds are that within a short while, you will find out that you tend to perform better on the days when you have a clearer head and this is another reason why you shouldn’t trade when you’re in a bad mood. Sure, you might prefer not to recall past losses but you learn more from a mistake than from winning trades. Without record keeping it’s way too easy for us to fool ourselves into believing we are doing better than we actually are. All good traders keep excellent records, no exceptions.
2.) Have a maximum loss target on every trade
This is crucial yet one of the most common/costly mistakes many new traders make is not admitting when they’re wrong; it takes a great deal of discipline to close a losing position out. So do have a maximum loss target on every trade, say no more than 2% of your pot. That’s obviously £100 on a pot of £5000. If you reach that maximum loss, close out, no matter what (ideally, by use of stop loss, to take bad willpower out of it). This means you need to hit 50 bad trades without any winners before you are knocked out of the game.
It took me a long time and a fair bit of money to realise that just because a price has fallen significantly that does not mean it cannot fall further or that it is cheap. If you were standing at a fairground and a man was hitting a stake into the ground and the stake was 500 cm long and he had already knocked in 372 cm would you want to bet a £1000 a cm that he could not knock it in any further? A lot of people who thought Marconi could not get any lower lost money.
It is crucial to learn how to take a hit. It can be distressing to bring oneself to sell below the price you bought at, or the price we could have sold at a few weeks ago, and in such circumstances we all imagine how our trade will return to profit. But it is impertinent to know how to ruthlessly cut your losses when you’ve got things wrong and move on to the next trade. Taking losses is probably the hardest lesson to learn because – as Gordon Gekko said the film Wall Street – ‘we do get emotional about prices’.
The opposite is also true. Just because something has gone up does not mean it cannot go further. If the same man was flying a kite and had got it up to 50 m would you want to bet he could not get it any higher? A few spreadbetters who are currently short in oil are finding out right now.
Make use of Guaranteed Stop Losses. Several of my friends trade with IG Index and don’t use guaranteed stops because they believe they’re too expensive. I got stopped out of PRK at $6.44 last week with a Guaranteed Stop which has just paid for 28 previous Guaranteed Stop’s. If a new 100% guaranteed parachute opening device was offered to you prior to making your next sky dive but would cost you an extra 0.3% of your total fee, you would say ‘No way I’m paying for that, anyway I’m in control, I know what I’m doing!!’ Some people just don’t get it…until they hit the ground…….ouch!!
3.) Define your risk-reward ratio
The typical reward-risk calculation is to divide the profit target by the amount that would be lost if the stop-loss level is hit. In the example above, the profit target is 25 points at £10 a point = £250. The stop-loss is 10 points at £10 a point = £100. Therefore, the reward-risk ratio is £250/£100 = 2.5. For most trades, the ratio should be between 2 and 3, with exceptional trades giving ratios of 5. If the average is 3, you can get seven out of 10 trades wrong and still make a small profit. However, the reality is that not all trades reach their target. So, attempting to get five out of 10 right and still be profitable is a much more achievable goal.
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In the chart above you can see that the Risk vs Reward factor is very good with the reward potential at about 3 times the risk.
4.) Have a profit target for every trade before you go in
Take the typical ‘trading academy’ advice that a spread betting company trots out for free ‘always place a stop loss to limit losses if the trade goes against you’…. I would translate this as ‘always place a stop loss to guarantee our profit when the trade goes against you.’ Advice in the punters interest would perhaps be ‘always set a limit order to lock in profits when you win’ but they don’t often tell you about that one.
So be sure to have a profit target for every trade before you go in. This should be about 3 times the maximum loss target. If you reach the profit target and feel like holding on, but are afraid of giving it all back, consider moving your stop up within max loss of the present price, i.e treat it as a new trade from there. Or else, close out half and let the other half run.
5.) Don’t be swayed by what you read on any discussion boards
Trust nobody. You do not know if the person giving you advice is bullshitting for his own ego or trying to get you to trust him so that you’ll give him money for more information or simply trying to bump his stock. The problem with knowing who is real and who is fake is that until you are at a point where you’ve experienced enough to know what it really takes and what you really have to do to make money, you cannot truly recognise bullshitters. It is akin to me trying to convince someone I served in Afghanistan with the Royal Anglians – I can talk about weapons, tactics, the environment…etc to a complete layman but anyone who has really served will spot my BS a mile off… (I was really the second man on the balcony).
So don’t be swayed by what you read on any discussion boards – make sure you are trading what YOU understand and know why YOU have made the decision that YOU have made. Don’t always be influenced by what others say or you’ll end up changing your mind all the time. There is lots to be learnt from understanding the psychology of the mind and I find it fascinating the divergence of comments on all topics. I don’t think people are born with a given mind set, it is largely developed through their situation and environment.
We all love sharing our experiences but they are based on OUR experiences, period of trading etc. YOU have to establish your own risk levels, stop parameters entry and exit points. Watch and read by all means but NEVER trade on what you read unless you have come to the same conclusion based on your own analysis. So once you have formed an opinion on market direction, don’t allow yourself to be easily swayed.
There is a quote attributed to Jesse Livermore to the effect that if I buy a stock on someone else’s recommendation, then I am reliant on the same person to tell me when to sell it. Trying to get people to post their transactions so they can be followed is hardly the best route for anyone’s long term trading future. It is not easy, some will survive but many will pass by and give up. That’s life.
There are no easy ways, nor right/wrong ways – only the ones that work for you. Good luck – but it won’t always go your way – and losing is a learning experience – no failure, only feedback !!
6.) Set stops a decent percentage away from your entry
If you are trading a share with a wide spread on sets then in the am its always a lot wider and the only real way of getting around this is by setting stops a decent percentage away from your entry and/or reduce your exposure. IMO far better to trade indices/commodities or the biggest stocks in the ftse as the rest just cause needless headaches.
If you mainly use spreadbetting for intraday/hour/minute trading, take extra care with overnight positions. If you have to run a position overnight consider removing the stops and waiting for the opening spread to settle down before re-applying the stops. This is especially critical where stocks are tradable in the states (adrs) where the spread betters are more than likely to take out any sensible stops.
When a trade is well in profit consider moving the stops to protect your profits.
7.) Maintain Discipline.
Without self-discipline, you will lose given enough time. Discipline is everything. It is human nature to realise profits (aren’t I brilliant!) and run losses (it will come good…..). So you need to be very harsh and set rigid stop losses. That is the basic reason (IMHO) why so many fund managers underperform the FTSE index. The market really, without any bias, reveals your personality.
8.) Keep it small and stick with stocks you know.
Keep it small and stick with stocks you know. You can always branch out when you can prove to yourself you can make money on those you have a “feel” for. So trading companies like Tesco or BP even at £1 to 5.00 can be much fun and is more realistic then 1p.
9.) Open accounts with different spread betting firms.
Open a few accounts with different companies and you’ll probably end up using more than one as they all have advantages and disadvantages.
11.) Watch out for changing margin rates.
In times of wild volatility spread bettors are more prone to losing and spread betting providers worry about bad debts – which is why they reserve the right to change margin rates at short notice (giving punters a week or two to put more cash on the table). And which is why most companies have stopped offering credit betting with Spreadex being one of the few ones I know that still offers credit accounts (both Cantor and City Index have discontinued them).
12.) Do not approach your spread bet broker with an adversorial attitude.
Sometimes IG stinks, sometimes Capital Spreads stinks – sometimes they all stink – it’s the price of doing business; if you can trade, then over time it does not matter as you will make more from them than they do from you. – if you approach your broker/spreadbet company…etc whatever with an adversarial attitude one thing is for sure you will never win. A win/win approach is the only way you survive in this game – you need to make money, but so do they, bear that in mind.
Always remember that you are the sole person for your trading success or failure in trading; blaming the market or your spread betting broker is convenient but display self-denial. Losses help you focus on whatever problem caused the bad trade.
If you think you will get a better deal at a proper fx broker – then go for it – 99% of forex brokers are also market makers making their own price and shading…etc so again you aren’t in the real market – the only way to escape this is to go direct to market and if don’t have enough money to do that and then you certainly would not be happy. Slippage is a cost of doing business but it’s cheaper than paying 40% capital gains tax!
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