Top 10 Mistakes Made by Spread Bettors
My new book ‘The Naked Trader's Guide to Spreadbetting’ has just been published.
You can get it at all outlets including Amazon. I hope it helps you to think about using spreadbetting as an excellent tax free tool, or if you are already spreadbetting I hope it will help you improve.
From the book here are what I believe to be the top mistakes new spread bettors make:
1. Confirmation bias leading to stubborn holding
Confirmation bias leading to stubborn holding of losing bets is the worst one. 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, there’s 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
Not understanding exposure or pounds per point is something that can make trading 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. Or: oh, look at that, I’ll try a tenner a point. Without realising they just put a tenner a point on a share costing £20, thereby 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? We’ll Take it Away!
Know your exposure.
3. Trading forex
Nearly everyone loses at trading forex. Have I mentioned this already? Yes, lots of times, so please don’t!
The thing is: why bother trying to make money with forex 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 or girl heading in with your chips. The casino is going to take them. It is just a matter of time.
4. Only spread betting and nothing else
I mention the mistake of only spread betting – and not investing or trading through other means – elsewhere in the book. 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 can be much more stressful.
You will start to get tempted into risky behavior 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 something to be done 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 the punter that all they’ve gotta do is follow the system and they’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.
Overtrading is the greatest danger of spread betting losers. It means you’ve got 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 lose.
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. Go to begambleaware.org right now.
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!
“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.
And finally, but most importantly…
10. Not cutting losers and running profits
I know, I can say this till I’m blue in the face and you still won’t do it will you?
If you don’t cut your losses quickly you will, eventually, lose overall. It really is that simple.
Sometimes it’s even worth cutting a share before it hits your stop if you think you’ve got it wrong. You can always get back in. That’s what my Get Out Quick approach does. Remember: you can still win overall by taking lots of small losses.
Meanwhile, don’t take quick profits of a couple of quid just because you had a run of losers and you’re desperate to bank a winner. Have the confidence to hold the winners for a while – it’s amazing when you do have a winner how much more it can carry on going up. You can always just raise your stop if you’re not sure about it. I have held some spread bets for years. Why not if the price keeps going up and stops aren’t hit?
So, while cutting losses and running profits might be a cliché, it's probably the most important spreadbetting rule.