If you are new to financial spread betting or even if you are a seasoned trader, you will make the occasional mistake however hard you try not to.
Any trader who tells you they never make a mistake is either telling porkies or simply doesn’t realise when he or she is making a mistake. Not knowing you have made a mistake is probably the worst kind of error you can make.
If you are new to the game, then hopefully your error rate should decrease as you gain more experience, but then there is the danger of getting too complacent, which can often result in mistakes that can really hurt. We’ll come back to that one later, but first, we’ll look at a few others that are easier to avoid.
Spread betting does take some getting used to, and you’re likely to make a few mistakes while you’re still learning. If you’re risking too much money, then those mistakes could end up. Spread betting can be risky, and it doesn’t take long to lose £££, one of my worst mistakes was going long on the FTSE and rushing the input of the deal. I meant to bet £3 per point movement on the FTSE and set a stop loss of 20 points away from entry.
Failing to apply the basics of money management to your trades
Money management is easy – in theory at least. The cardinal rule is never risk more than you can afford and are willing to lose. But how much is that? Does it depend on your mood and how optimistic you feel on the day? If you have had a good run, do you feel you can afford to lose more so you become more reckless or, if you’ve had a lousy run, do you tend to reduce the size of your trades? Perhaps you do the opposite.
Either way, if any of these apply to your trading style, you are not alone. Many traders let their emotions sway their decisions rather than engaging the rational part of their brain. They prefer to fly by the seat of their pants instead of sticking to a well thought-out plan.
While we don’t want to clip your wings, that kind of roller-coaster ride might be a great way to trade if you are an adrenaline junkie, but if you’re going to profit in the long term, a calmer cooler rational approach is more likely to succeed.
You can start with a simple rule of thumb. A good one is “Never risk more than 2% of your trading account on any individual trade”.
Maybe you think that should be 1%, or 2.5%, or another amount; it’s up to you, but never go above your chosen percentage. Make the rule and stick to it. When you have a hunch and want to risk a little more, remind yourself of the rule and avoid being tempted.
Forgetting to make a stop-loss order
When people say they forgot to make a stop-loss order, it’s a little hard to believe that they really did forget. There are some good reasons not to place a stop-loss order, especially in highly volatile markets. In some circumstances, a stop-loss order might lock in a loss and mean you miss out from a market reversal. But forgetting to place one?
Spread Betting Mistakes Chart
Think carefully about every aspect of your trade and when appropriate (and it mostly is) make sure you limit your potential loss. It’s just another aspect of money management. If you think you might forget, write it on a Post-it and stick it on your monitor.
Failing to understand leverage
Leverage used correctly is a great tool. With it, you can make trades that allow you to profit on minimal changes in asset prices. You can similarly lose money quickly. However, leverage does provide many more options. Failing to understand how and when to use it is a big mistake and one that new traders frequently make. The main reason why novice spread betters get into trouble is that they are too highly leveraged.
This can have catastrophic consequences, as in the case of the Swiss Franc decoupling from the Euro in 2015 when a number of traders were far too leveraged and the huge move in the currency pair led to many of them – and even some brokers – going bankrupt. In effect people were risking tens or even hundreds of times more money than they could actually afford to lose.
In 2018 The European Securities and Markets Authority (ESMA) introduced new rules on leverage and margins to protect inexperienced traders from making significant losses. These rules were also adopted by the FCA in the UK.
The rules are probably a good idea though there are many dissenters amongst the spread betting community in the EU and UK who are affected by them. The new regulations rules limit leverage to between 30:1 and 2:1 depending on the instrument. Previously they were as high as 300:1. However, if you are an experienced trader, you can apply for professional status, which, if granted, removes the limits.
The key to using leverage is to only use an amount you can truly afford to lose if there was a big market move against you such as the Swiss Franc-Euro incident. Remember what leverage actually is – a broker lending you money to trade with. Make sure you can afford to pay them back.
Getting too complacent
We mentioned this in the introduction. Complacency is no less an enemy in financial spread betting than it is in many other aspects of life. Complacency can creep in when a trader has had a run of winning trades and starts thinking the game is easy; then starts placing outsize bets or placing trades without really thinking them through. The result is almost always painful losses and (hopefully) a lesson learned.
Another example of how complacency can impact your trading performance is the total unawareness of the fragility of major financial institutions before the 2007 financial crisis.
There was no shortage of indicators that dangers lurked ahead, and those who were smart enough to call them made a lot of money. The vast majority of traders had become complacent however after years of a bull market and did not plan for a crash in the market.
Even before the coronavirus, various analysts were suggesting there could be another global crisis in 2020. Don’t assume that things won’t change. They will. And when they do, there is usually an excellent opportunity to make a substantial profit.
Jumping in at the deep end
As everyone knows, if you jump in at the deep end, you will either sink or swim. In fact, with spread betting, it is far more likely to be the latter. The way to avoid these and many more costly mistakes is to do some homework and practice on a demo account before you dive in and start using real money.
There is plenty of information available, so make sure you read and take notice of it. There is a learning curve to climb before you can expect to make regular profits on financial spreads, but doing so is certainly worth the effort.
If you can avoid making all the mistakes above you will be well ahead of the majority of traders. You can also get ahead of them by checking out our Winning Trading Systems list. All the systems on the list have passed a live trial here at Trade Stocks & Forex.
The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.
Don’t chase your losses…
Chasing my losses – going long on FTSE Friday afternoon as it “must go up” (used my stop on this one though!).
What is happening here is simple human nature. You start doing well, so load up a bit more…then a bit more. Then, things go against you so you add more in the opposite direction…and then you realise you’re heavily underwater.
I fell into the trap myself having taken GBP/JPY down from 230ish to 198 (and various other instruments) and lost all I had made in the move back to 211 This is known as an “inverted triangle/pyramid” in trading terms – you should never add to a position more than you started with.
I now view what I went through as an excellent learning process. I am far more careful and controlled and am not being greedy. Yes, on occasion I’ve taken profits and in hindsight it was the wrong thing to do, but being out of the market means you’re NOT going to lose and have locked in whatever gains you’ve made.* The trick is then not to think “oh, I shouldn’t have done that” and pile back in at a worse position risking more.
Don’t take profits too early…
Taking profits too early – went long as soon as SHIRES results came in but cashed in with 5 point profit (went up 30 before fading a bit).
Don’t place your stops too tight…
Another mistake I made (and regrettably still make at times) was/is placing the stop too close to the entry point, in which case a volatile market could trigger your stop and vanish your money straightaway; which is even more annoying when you realise that it was indeed the right choice to go short (or long) but you lost because you were scared enough to go for a ‘braver’ stop point than taking the one recommended by the platform.
Be wary of the volatility of the market you are trading in when setting stop losses
When I initially started using spread betting I was setting stops (not guaranteed stops just the ones you can set up from your computer via logging into ETX Capital’s trading screen.) at between 10 and 20% less than that days opening price. I did reset these every day, then got lazy and stopped bothering after a while. Not so with Falcon Oil though as I knew this was a volatile share that needed close monitoring and I set stops at what I though was a reasonable distance from actual price. Then I got burnt on a Falcon oil stop out in February one evening when I left work at 6pm and returned to my computer at 9.30pm to check that evening’s action only to find that the share price had collapsed 35% or so in 3 hours and I got stopped out whilst share price rebounded back by another 10% or so. So I stopped using stops and instead decided after reopening more spread bets on Falcon Oil to just watch Falcon like a hawk (no pun intended). This approach works well with shares that behave in a normal way and if you are disciplined enough to stick to your mental stop losses. In the case of Falcon Oil as again last week with no stops in place I could not call the market and decide what to do/dithered/fiddled…etc and just saw share price floor it through the $3 and $2 and then $1.40 levels…etc. In hindsight, if I had set a guaranteed stop when SP was at $3.60 I might have saved myself a lot of dosh…
Check Dividend Dates…
Had a rolling spread bet on Yell (short ) which Finspreads closed last night @ 501p. Today they opened the start price @ 491p. Checked with them and they informed me that because Yell issued 10p dividend that the opening price had been dropped by 10p.. All this means that I start the day with 15 point drop from last nights close…(as it currently stands ). The lesson is check dividend dates.. Stupid boy !!!!
There is a world of difference between deciding to close a bet and actually getting it closed
I learned that there is a world of difference between deciding to close a bet and actually getting it closed when there is heavy (panicked?) trading going on. Well, it wasn’t quite as bad as it might have been, but I have lost about half of my pot in a few days holding on to Soco (stock) watching the sands run out and then seeing it crashing down while I was trying to sell my 3k spread bet.
Took 20 minutes with lots of rejected trades as I find out they would only do 500 at a time no matter what volume’s available in the market and they also reject the deal if the bid moves in your favour in the 30s it takes them to think about it (strangely they’ve no problem if it moves against you). I suppose I could have phoned – but I suspect it was a busy morning and I might well have been on hold for 20 minutes.
Had Soco gone to 0 I’d still be in the game, albeit with a blotted copybook as IG would have had to wait a week or so for a chunk of their money as I raised funds from the rest of the portfolio but I still felt I had something useful to communicate – at £15, £10 looked far off. But it wasn’t. After a few precipitous drops with no stock specific reason whatsoever, £10 was concerningly close. If this happens just because the market’s getting a bit jittery, what would happen if we actually had even minor bad news?
This was a very valuable learning experience about how even quite modest gearing can be very dangerous. For a valuation based approach, stop losses are a lunatic capital destroying concept. But if you choose to use leverage you have put yourself at the mercy of the market and have no choice whatsoever but to employ them. Your choice is just whether they are at the point of complete ruination or somewhere less painful but more likely to be triggered.
Do not move your stops once set…
Moving stops (not trailing stops) is a very dangerous game and basically means you didn’t get it right in the first place. If you keep wanting to move them then examine why they are in the wrong place and modify your processes. Otherwise, stick to them: it’s cheaper in the long run – ‘I know, for I was that man’. Those who keep moving their stops further away…they call themselves ‘long term investors’. And there are plenty of those ‘long term investors’ such as those who bought QCOM at $200 (before split of $800) in 2000 and still hold it today at $35 because they have been thinking: ‘as soon as the stock price goes back up to my buy price I would sell. And I really haven’t ‘lost’ because I haven’t ‘sold’.
If you exceed your stop, close out and re-enter the trade if necessary.
Be careful leaving stops on the indices after the market closes
Beware that trading on the FTSE is stopped at around 4.40pm for around 15 minutes as the auction closes the day’s FTSE positions however at some spread betting providers the system will only shut down at 9pm. So even though the FTSE market is closed after 4.30pm, their spread betting system is still operational for a few more hours and returning prices for tomorrow’s predicted opening. This means that trades and stops can still be taken out during this time.
This week I will be more disciplined but will short everything
I’m afraid deciding ahead of time which way the market will go is another mistake. Trade what the market does and not what you think…Better wait until at least 9am to see the general state of the market before doing anything.
Never enter the market without a proper money management strategy
One of the most successful traders ever seen in the spread betting industry is Mark Shipman, whose book ‘The Next Big Investment Boom’ is a worthwhile read. He never puts more than 5% of his ‘investment pot’ into any one position. Walking into a casino and putting all your money down on black or red is not investing – but that’s effectively what traders do when they put all their risk capital into a long or short position.
Time invested in a trade does not equal money!
In everyday life we are often led to believe that time invested is directly proportional to money – however with trading this is not necessarily so, in fact in the trading world time has a disproportionate correlation to money. For instance you could make 50% profit in 2 weeks and remain in the trade to extract some more profits (with the belief that more time invested = more money) and spend the next 3 months giving it back.
Be careful with future rollovers
Be careful because if you set your account so that spread bets are automatically rolled over this could mean that BOTH daily bets and futures (say a March future spread bet) get closed and re-opened automatically. You may not, however, always want the future to roll… Note that this also means that any stops or limits attached to these positions will also automatically roll.
Do not ‘boredom trade’…
Do not trade just because there is not much happening in the markets. Always have a reason for each and every trade that you do – don’t do it just because you think the UK FTSE 100 looks cheap!
Carelessness
What Is A Spread In Sports Betting
Not really a mistake but had my mouse on the buy button when FTSE was at its low on Friday but pulled out – it went up 20 points. Don’t know why I’m telling you this but I guess my point is don’t EVER take things for granted and once you have a plan STICK TO IT!
Spread betting can be risky, and it doesn’t take long to lose £££, one of my worst mistakes was going long on the FTSE and rushing the input of the deal. I meant to bet £3 per point movement on the FTSE and set a stop loss of 20 points away from entry. However, in error I put it all in the same field and went long by £320 per point – and watched it rack up a £3000 loss in 40-50 seconds. Lucky i held my nerve and closed out with a profit – the irony being had i have left it open I would have made £10k. A case of VERY FAT FINGERS.
In another instance. I was showing a mate of mine my spread betting trading platform with live feed. I said and if you wanted to BUY any PET shares you’d click on that button and if you clicked on the SELL icon…For some reason he thought that I had suggested he clicked on the SELL button so he did…
A message came up that they were processing the sale of my entire PET holding… I grabbed the phone to see if I could cancel my instruction……but fortunately within 30 seconds a message appeared to say that my ‘SELL’ was above the current market size for PET and that I should put through a sell in smaller amounts or phone the Bet company direct. PHEW !!!!!!!
You really have to watch what’s going on with the trades in order to ensure nothing stupid happens, (like opening a bet at £30 a point on the FTSE that you thought you had closed only to find out a few days later that it hadn’t closed and you were £3k down!).
Also, watch the units as £1 per point = 100 shares for companies. You can easily place an order for tens of thousands without realizing. For instance I still remember when starting out that in one occasion I forgot to enter a . in my amount and ended up with a bet way larger than I wanted to. Obviously it went against me and made me lose my initial gains on this account but thanks to my tight stop loss nothing too critical. Also, you can trade the indices and sectors very easily with enormous values thanks to the minimum margin – used to be £50 for the FTSE or £100 for the Dow Jones. The DJIA spreadbet works in pounds not dollars so watch that too… My advice would be to open a demo account and get a feel for a platform first while continuing to paper/demo trade.