When I started to really analyse my spread betting trades for the past few years I saw some common themes some of which were positive and others negative. This is free, honest, advice which is backed by years worth of slog and frustrations. To be a spread trader you need time, commitment, patience, knowledge and the right skills to be consistently profitable.
Here are some nuggets of wisdom that I wanted to share -:
- Rule #1 -Stick with the trend as much as humanly possible.
Stick with the trend as much as humanly possible. It can always go higher or lower and rarely has it gone ‘too far’. If you do play reversals, make sure your target is lower than that of a level with trend entry and always make sure these are taken at major support or resistance areas or support becoming resistance/resistance becoming support areas. Below is a quick chart as to what I believe has helped in my trading success and it is the technical phenomenon of ‘resistance becoming support’ and ‘support becoming resistance’. I wish someone told me about it at the very start.
- Rule #1 -Have a definite setup that marks your entry into the market be it technical or otherwise.
Check for any major news announcement before entering your trade – taking a position on gbpusd 1 minute before mervyn king makes an announcement wouldn’t be favourable.
- Rule #1 -Let your winners run
How true the above statement is, had I let the winners mentioned above run I would be sitting on some very nice paper profits. One of the hardest things to do is to see a large profit on your screen and not be tempted to sell. You start justifying it to yourself by saying that the fundamentals aren’t as strong as before, or where will the growth come from? Or markets are going bearish now. Although these seem like rational arguments they are made generally when the market is tanking and/or your cortisol level is going haywire. This is where a detailed diary is handy. Not just why you chose that share but where will growth come from? Forecasts etc also to be included and updated for each share you hold especially when significant news (both good and bad) is out. Your diary should reflect this. So that when the market tanks and/or your share is down 5-10% you look at your diary which was written when you were making logical decisions and then you decide on what to do.
- Rule #2 -Cut your losses
My losses for me were due to a series of bad timing, no access to share price/news at the time or at times panicking. Remedy is therefore that you have a iphone with a decent software such as shareprice which you can check during the day. Sign up to a RNS alert via sms like RNSzone or RNSAlarm. It only costs £5-10 but would save you loads.
- Rule #3 -Minimise the number of high risk shares in the portfolio
I know that this could be subjective based on each individuals appetite for risk. For example, I don’t consider all AIM shares to be high risk (although I agree majority are) whereas other traders do (I think). I tend to have 1-2 high risk shares in the portfolio that have a real (emphasis) probability of high reward. I also don’t understand mining shares at all so when I do mention one and its bonkers please help me ;-). If you minimise the number of high risk shares your portfolio will be stronger. Be strict in your trading; although an occasional dabble won’t do (much) harm this shouldn’t be your main portfolio.
- Rule #4 -Be Patient
Sometimes I am in boring shares that don’t do much for a while and then they just pounce but patience is really tested. This goes down to timing. It is better to miss a few points and have the volume to make sure that it is truly going to be moving.
- Rule #5 -Try to find a mentor
I think there is no substitute to learning from people who are good at their craft and that’s how I did it but you have to find people who trade like you i.e. a forex trader and I will hardly ever agree.
- Rule #6 -Sometimes you will be wrong
You won’t get all your trades right. Trading losses are there, there are always going to be losses and we just have to accept them as business expenses or paying a secretary etc… what we can control is to make sure that our losses are much smaller than our gains… In fact I’d say some losses are inevitable. Some companies are run by, or manipulated by, crooks. Some large companies – like Aero Inventory – disappear without warning. Others like Cattles don’t reveal the true level of their problems to their shareholders. The consequent losses are what the Americans call – ‘the cost of doing business’.
Other times you will plain be wrong but this is not something to feel upset about as the most effective way to learn anything in life is to make mistakes. I have always advocated that you learn more from studying losing trades than you do from the winning trades. Studying a winning trade only allows you to try and improve your exit and re-entry strategies. Studying losing trades forces you to study the whole strategy. More importantly if you don’t monitor or publish both losers and winners you can’t monitor win/losing ratios, win expectations and risk:reward of the strategy. Without that support it’s very difficult to find confidence to move from £1 per point up to a level that will achieve a realistic income (say £10-40 per point).
I know it – maybe the financial loss that gets you down but if you wanted to go to university or train for a different profession it would cost. So really try to think of losses as the cost of doing business and going towards your trading education. On a serious note, you really do need to analyse your trades, otherwise you will make the same mistakes as you will have forgotten them by the time you make that mistake again! Do the analysis, keep it to yourself, document it and promise not to make the same mistakes again. You will feel better once you become a better trader.
I keep a diary of all the trades I am researching. In this context I find alarms are better than monitors. I can’t remember the amount of times I have missed a trade as I didn’t see it move or didn’t have an alarm. What I did was compare the trades I did with the ones I researched and I found I missed a lot of trades due to not realising it rose or not having trading capital. Alarms stop you from having to waste time scanning your monitor to see what was moving and typically in the process missing out on trades. These alerts would obviously be based on criteria you select such as volume, buy price etc.
- Rule #7 -Don’t chase losses!
As the market adage has it: ‘What is the definition of a stock which has fallen by 90%? One which has dropped by 80% – and then halved again.’ I have accepted previous losses and this is an important lesson, am not chasing those losses. That money is gone, I have started from scratch and feel no pressure to regain what I have lost. Every penny I make now is profit and that breeds confidence and happiness.
Here’s what can happen if you try chasing losses – what follows is a real experience from a share trader:“I thought I’d share this. I’d been fascinated by the stock market for years but didn’t start investing until the bull run up to the 2007 high. I thought it was easy money and my stockpicking was little more scientific than sticking a needle in Times stock list at lunchtime. Then the financial crisis hit and in my experienced (or so I thought) opinion this was so over blown. I mean, who’d ever heard of a bank fail? I decided that NRK (Northern Rock) when it hit 400p was a buying opportunity. I bought some, a lot. It fell. “Cheap” I thought, I added. It fell. I added again because at 200p, it couldn’t get cheaper – could it? The rest as we know is history.”“I was sitting on a loss. At the time, a big one and one I was too embarrassed to share with my wife. Don’t get me wrong, I wasn’t destitute but it was savings I really shouldn’t have committed. I pulled my funds out of the market and got Googling investing books. “
- Rule #8 -Keep a trading diary
Successful business people are always minding their books – so keep a trading journal. Don’t just record your entry and exit points, but also take note as to why you entered the spread trade, and whether you stuck to that opinion or what happened to make you change your opinion, as well as your feelings, before, during and after the trade. Once you do this for sometime, you will start recognising certain patterns and this will make it easier to spot what you are doing wrong.