Spread betting allows the unwary punter the opportunity to lose far more money than they’d bargained for, so a clear understanding of the market, methods, techniques and pitfalls is crucial to avoid the pitfalls.
You will of course be familiar with the line “Well, that’s never happened before”. Indeed you will have used the very same sentence yourself, probably far more than just the once. That is because something, somewhere – in fact almost everything, everywhere, happens when you’re not expecting it.
Unlike fixed-odds betting, spreads are not so much concerned with who will win, but more about by how much, how far, how many . . . Often these markets are without limit, risking the unwary trader’s losses.
There are a number simple, yet basic principles that determine one’s fate in becoming a better spread trader. These principles may appear simple, but they are essential keys to unlocking the door towards becoming a spread betting millionaire, or at least improving your chances of coming out ahead!
Here is a spread betting tip which is not used by many traders, but which can have a marked effect on your account. Consider that you may have a winning position, but you are unsure how far the profits will rise. You do not want to leave the whole position open, worrying if the price will reverse and take all your profits away, but you would like to make more profit out of it, if it keeps going. The answer is to close part of the position, locking in some profits while still holding an interest in the trade in case it continues to climb.
Say for example that you initially spread bet at £10 per point, buying the position, you could now sell £5 per point, closing half of the position and locking in the gains. If you now raised your stop loss level to your initial trade entry, even if the price fell back to the beginning level you would still have a decent profit locked in. Unless you pay extra, stop losses are not guaranteed, but you should retain most of your gains with this tactic.
It is also wise to keep the number of open trades to a number your can manage easily and efficiently particularly if you are just starting out or are prone to impulsive trades. This will help keep your mindset clear and make more informed decisions.
Another tip is to enter a position in parts, too. You might use this if you think you have missed the ideal entry, the lowest level, but are not sure if the price will return to the support level once more before surging upward. If you take up the spread bets for half the amount if it keeps on going up without returning to the support at least you have a position, without risking losses. If it does return to support, you take up the other half of the spread bet, building a position for a lower average entry price.
If the price does keep climbing, you can also consider taking up the second half of your bet. Granted, this does increase your average entry level, but at this time you have better confidence that the price will continue climbing. On the other hand, and particularly if day trading- if something doesn’t take off within a very short period of opening a trade, consider closing the position. Perhaps there’s something to be said for the “if it’s not taking off, close it early” point of view in breakout trading.
When trading it is also important to keep a review of your trades as this helps you to learn from your mistakes which in turns greatly improves your chances of coming out on top. In this instance it makes sense to keep a trading diary and to look back on each trade and see what went wrong as this gives you a possibility to correct things in the future.
When entering trades always use a stop loss. Stop loss orders are a pre-agreed price level at which you decide to exit a trade if the market moves against you. A 20% stop loss level is a good rule of thumb. It means that if you were to go long (buy) on a share at 200p and then it starts falling, 160p would be the trigger price at which you would admit that you were wrong on the trade. For large and liquidshares like Vodafone or Tesco a more tight stop loss (say 10%) might be in order. Likewise, allowing stop levels of up to 30% for smaller AIM companies might be wise to ride out the day-to-day volatility.
And lastly but not least be patient. Don’t be angry with yourself for missing opportunities. If you miss one bus, there will be another along shortly….just means you’ll be at your destination a little later than anticipated 🙂
Emotions such as greed, fear and hope can cloud your judgement and cause you to make irrational decisions. Fear will block you from taking a position, but greed will prevent you from making a profit. A spread betting strategy helps to take those heat-of-the-moment decisions completely out of the equation, predetermining profit goals, maximum loss allowances, entry/exit points and more.