Have a Trading Plan

Spread betting and trading in general can be challenging activities; if it was easy to make a living day trading, everyone would be doing it. This is why you need to have a trading plan and strategy; trading without a strategy is the most surefire way to maximise losses. Unfortunately, many beginner spread traders tend to spread bet with their hearts, buying and selling markets purely on guesswork and feelings.

Discipline in Spread Trading

“Trade with your head, not your heart. Develop a trading strategy and stick with it. The consistent application and discipline to adhere to your trading plan i.e. doing the right things systematically time and time again, sticking to your backtested plan and the time frames you’ve tested that will help you achieve success in the long run. The key is to have a plan in writing before the event, with bailout positions wherever they maybe be, then when the market does fall or whatever you don’t have to make spur of moment decisions and just let stops take one out.. not nice to watch, but losses are part of trading.”

One essential risk-management tool for traders is having a trading plan to help guide trades. A trading plan is basically a set of rules that encompasses your approach to the markets, including which markets you’re going to trade, how long you’re likely to hold a trade for, the entry or exit levels at which you intend to take profits or cut losing trades and how much you will risk on each trade.

Without a trading plan, you plan to fail. Why? Because you are more likely to mistime your trades or set stops too close and take your profits too early. You’d also more prone to let losses ride and worst of all, you are more likely to end up panicking when things don’t go your way. Before you even place a spread bet, you should know exactly why you are opening the position and you should have already planned where to take a profit and, more importantly, where you are willing to have your trade stopped out, setting out stop loss and limit orders in the process. Having a spread betting strategy with clear entry and exit signals requires constant testing and re-touching to make sure that it actually works for you and the markets in which you trade. Regardless of your spread betting expertise, a good way of testing your financial spread betting system is with a free demo account.

A good trading plan should include details of the -:

  1. The time frame you wish to trade;
  2. The market you are trading;
  3. The risks you are willing to take (risk/reward ratio)
  4. Risk management tools
  5. Your entry and exit triggers for each spread trade
  6. Your back testing

To succeed in trading you need to have a trading plan and you need to make sure that your potential profits exceed the possible losses by a ratio of at least 2:1. (preferably 3:1).

It was only after 2008 day trading that I became convinced exits are more important than entries but we all tend to focus on what to buy and when to buy it. Little attention is paid at the time of entry to the sell signal options. Even a lot of books, journalists and tipsters are wrapped up in what and when to buy to a degree that the novice trader gets sucked in, yet the fact is even with the best money management, stock selection and entry signals it’s only the exit that determines profit/loss.

All professional spread bettors trade using some form of trading strategy which tells them everything, from trade setups, entry and exit signals, stop loss placement, position sizing and more. If your strategy doesn’t tell you how much maximum draw down you might get hit with – how can you have faith in it? The issue is about defining exactly what you want to do and when you are going to do it. Write it down on paper and get to know it until it becomes instinctive. One strategy will often lead into another. If you have faith in your strategy there’s no problem being long because trailing stops keep you safe. If you get stopped out, your strategy should tell you when to buy back in. All assuming you have a strategy to start with of course. If you haven’t you may as well flip a coin and hope for the best. Indicators told me to tighten my stops. The same indicators will tell me to when to slacken the stops or if I should get out of long positions for a while and when to get back in.

Also, make sure to identify what kind of trader you are? Are you looking to day trade the markets? (i.e. get in and exit the trade in a matter of days or even hours). Or are you a position or swing trader? Do you plan to trade long term for investment or short term for income? Do you envisage making trades over weekly or monthly time frames, patiently awaiting for the market you’re trading to hit a target price level? In such situations your trading rules will be different, and so will your entry and exit signals. And irrespective of your trading system, it is crucial that you recognise your own strengths, weaknesses and personal preferences when working on a trading plan.

Spread Betting: Trading with a Plan

“Take things slowly. Bear in mind that you stand a good chance that your initial trades will lose by 10-15% so only trade small amounts to start with. If you open a trade with a 3% spread and a 10% stop you are down by 13% if the market decides to retrace and stops you out. Keep also in mind with every trade you look at, there is a good chance of losing 10-15%. If you open say four or five trades consider how much £ total 4 or 5 times -15% equals. Be sure you’re comfortable with losing that amount.”

Lastly, whatever your spread betting strategy, it is crucial that you can foresee scheduled financial events that may impact your trading. If you do not know when a company reports on its profits, or the house price index will be released, how can you predict what will happen to your markets? This is why it is vital to use an economic calendar to support your fundamental market analysis.