The Top 10 Mistakes Made By New Spread Bettors
The Top 10 Mistakes Made By New Spread Bettors
I get lots of mails about spreadbetting - so I thought you might be interested in a handy top ten list of mistakes made by newbies.
1. Confirmation bias leading to stubborn holding
This is the worst one and I have met so many with this problem.
I cover this in a lot of depth in my psychology book “Trade Like A Shark”. Confirmation bias means you are absolutely certain you are right about a trade and blinded to any negatives. You are so certain you end up sticking to the trade, whatever happens. Indeed you are so right you average down and buy some more. You had a stop but stops are for wimps, right?
Even when you are down a lot it is still going to come back and anyway no point taking a loss now is there? At least it is all on margin so you haven’t had to put up too much money yet and a loss isn’t a loss till it’s taken!
2. Not understanding exposure/pounds per point
This is what can go very wrong for new spread bettors. OK, says new spread bettor. I’ll always have a tenner a point or a fiver a point on this or that. Oh, look at that I’ll try a tenner a point. Without realizing they just put a tenner a point on a share costing 20 quid so getting exposure of £20,000! They just didn’t think about it. You must always know what your exposure is EVERY TIME!
Is it exposure you can afford? Can you see yourself featured on Can’t Pay Won’t Pay?
Know your exposure.
3. Trading forex
Nearly everyone loses at trading forex. Have I mentioned this already? Yes, lots of times, please don’t!
The thing is: why bother trying to make money here when there are easier ways, and you know for a fact that nearly everyone loses? Have a look at the stories dotted around the book for more. Think of currency trading as a giant casino at Las Vegas. You’re the little guy/girl heading in with your chips. The casino is going to take them, it is just a matter of time.
4. Only spreadbetting and nothing else
You can see the argument: well it doesn’t cost much more than a normal trade and it is tax free so why not?
Psychologically, though, it is not a good idea. Spread betting can lead to overtrading, you can use up too much leverage. You can see the profits and losses going up and down every second. It looks and can be much more stressful.
You will start to get tempted into risky behaviour and before you know it you’ll be betting on the pound against the dollar, buying bitcoins and selling oil. Before you know it you’ll be in a right mess. Treat spread betting as complementary to your other trading not on its own.
5. System addict
A punter will buy a supa dupa ‘system’. This system claims amazing success rates. The ad blurb will assure you that all you’ve gotta do is follow the system and you’ll be RICH! (or even RICH!!!!!!) And it’s all so EASY!
Believe me, the only person making money will be the clever sod that sold you the system. Because if the supa dupa system worked, the person trying to sell it to you would be in Barbados surrounded by a bevy of beauties. He certainly wouldn’t be sitting in an office in Slough trying to flog you a system.
This is the greatest danger of spread betting losers – getting addicted. You love all the flashing lights. While your partner is busy watching Eastenders you’re busy getting burned trading the Dow up and down, down and up – bashing buttons feverishly to get back the money you lost.
It’s a fact that the biggest losers are those who trade too much. If you’ve been placing ten or more trades a day, you are probably in this camp. Stop and rethink. If you can’t stop, you may have a gambling problem and need to seek help. (www.gambleaware.co.uk).
7. Playing indices too much
Instead of trading shares, you suddenly got addicted to playing the FTSE 100 – maybe even making loads of trades on it in one day, taking quick profits here and quick losses there. At 4.30pm you come away from your computer absolutely shattered. You didn’t do the work you were supposed to do that day. In fact, your normal work is suffering – yet you might only be making a tiny profit, or more likely losses. You’re wasting your energy over a few points here and there.
Better to waste your energy down the pub with a few pints here and there instead. At least you could relax.
The sheer pace and frequency of index movements could see you become grumpy and bad-tempered and caring about nothing but those numbers going up or down. If you recognise yourself here, have a good think.
Overplaying indices = losses. I promise.
8. Getting emotional and losing it
F*$*!@ b!*@§*, a£*! and even c@!*=!.
If you do find yourself shouting at the screen and blaming everyone else for your losses then you may be losing it.
You MUST keep a grip on your emotions when spread betting; stay calm and under control. If you are spread betting you must consider it a business, not a hobby. And in business there is no time for emotion. Look at your trades calmly and don’t fall in love with a company – they are just items to be traded. If the trade isn’t working out then dump it, don’t get emotional. Keep a clear head.
And don’t have too many pints at lunchtime and then trade either!
9. Buying against the trend or trying to spot a turn
This can end in disaster. You think, “This company’s share price has gone up quite a bit. It must be time for it to go down. I’ll go short.” But it keeps going up, you keep your short open and you end up a sore loser. This can happen time and time again. Better to let the trend of your share dictate what you do than trying to guess when the trend has changed.
Try to follow trends and not go against them, being a smartarse.
Remember: your few quid will be flattened by the rush of much bigger money. Trends stay in place longer than you think and they often go against all rational logic.
Never forget: markets can be irrational far longer than you can stay solvent.
“Greed is the biggest barrier to winning at spread betting,” one trader told me.
He thinks it’s similar to betting on the horses. A punter has a couple of big wins and then gets greedy. He ups his stake, maybe chucks all he has on an odds-on punt that comes second, and walks out of the betting shop with nothing – rather than taking his earlier wins and pocketing them.
The best advice from this trader was, “If you win, bank some of it.” He doesn’t mean put it in your spread betting account, he quite literally means BANK it. Yes, put it in the bank. Keep it safe from your own tempted hands!
I think the problem is that, after a few wins, punters look at their accounts and think, “Oooooh, now I can bet even more and with even bigger amounts!” Oh greedy one, you will be undone.