If someone has a bad experience with derivatives, it is not the fault of the financial instrument. My first few years of trading were similar to what I now see from so many newcomers and many commonly fall for all the usual new trader mistakes which resulted in me losing tens of thousands in the beginning. I get so frustrated when people don’t realise that slowly and consistently is the way to build wealth – there is no quick rich scheme that works!
The 7 deadly Sins that most traders make
“Have YOU made any of these Mistakes?¨
- Bought a share `cheap´ on the way down (only to find it drops even lower)!
- Held on to that share as it falls lower still!
- Bought more of the same shares as they fall (averaging down)!
- Bought shares because they were ‘Tipped’
- Snatched at profits (only to see the price soar after you sell)!
- Bought penny shares thinking that they only have to go up a tiny amount to make a huge profit! Then been unable to sell them even if they do rise
- Over-traded and burned out your capital
Why do traders and investors fail? They make bad decisions. And in a few cases they make the problem worse by not learning from their mistakes and compounding bad decision upon bad decision. You cannot separate trading or investing from decision-making, for like it or not, the very act of trading means that both are intrinsically linked.
Einstein once commented ‘Anyone who has never made a mistake has never tried anything new’. Making mistakes are inevitable if you are starting out and there’s nothing wrong with making a mistake as long as you learn something from it.
Top 10 Trading Mistakes to Avoid on
My spread betting account turned profitable only once I changed tack slightly and basically tried to ‘not to lose’ rather than concentrating on ‘winning’.
In this section we go over the biggest mistakes you can make when spread betting. For derivatives and spread betting in general:
- Rule #1 – Don’t run before you can walk. I have the scars to prove running before you can walk at the beginning. You need an iron will for trading. Set your own rules, your own targets and STICK TO THEM even if it means taking the odd loss. Anyone who thinks you can trade without losses is like taking up snowboarding without falling over. If you are just starting out make sure to first practice paper trading and build a dummy portfolio to increase your confidence. For instance, forex trading is a dangerous market to get in if you are just starting out – most forex traders lose!
A novice needs to learn the ropes first and stick to the motorway routes before venturing out onto the minefield of the tributaries inter-connecting these motorways.
- Rule #2 – Do not over gear yourself. Don’t overuse the leverage or credit you get. For instance, if you deposit GBP10,000, you’d typically be able to buy up to GBP100,000 worth of blue chip shares. Traders tend to blow out because they abuse the leverage. “If you think you’re using too much leverage you probably are”.
- Rule #3 – See rule one. Here it is worth noting that the bigger your spread betting trades are, the more difficult it is to get out of a trade particularly if you deal in individual shares.
People who can’t grasp this simple rule shouldn’t demonise the instrument and try to put others off. Others are perfectly capable of following a few simple rules.
If you are trying spreadbetting as a novice then make sure you are disciplined. Beginners have to keep in mind that although spread betting provides an opportunity to make make significant profits, the geared nature of the product also means that a small movement in price of the underlying asset will translate in a much larger movement in the investor’s profit and loss, so it is possible to lose more than the initial deposit. Of course, it is an excellent medium if used correctly.
If you only have £2k to risk, then gear accordingly but DON’T ever leverage yourself to the tilt! Take your time to research some companies, invest your money, and enjoy yourself. I’d personally only invest in 2 shares maximum with that amount.
- Rule #4 -Avoid Small Caps
Spread betting a small cap or penny share is mostly silly. When you are trading in small caps you will find that prices are very volatile and also that the spread between bid and offer can be very wide. Look at the buy prices and sell prices for one small cap stocks I’ve picked up randomly today: can buy at 7.625p and sell at 7.55p. On a spreadbet you’d get 7.51 and 7.74p i.e. the inside prices are what matters.
Even if trading normal shares if you buy a penny stock at 2p, with a spread of 1p about the 1.5p mid-price, (2p offer, 1p bid) apart from the brokerage and stamp duty, you have to make almost a 50% gain to get back to where you started.
On the other hand, something like BP. with an share price of about 500p has a spread of perhaps 0.1p. The same applies for spread betting. Trading small caps will kill you. Generally speaking, in times of falling markets and increased volatility, investors want to be out of small-caps, which are less liquid, for fear of not being able to sell if they need to. Also, in general avoid stocks that are 1) biotech 2) over the counter.
- Rule #5 -Make sure to constantly monitor your trades
Always use stops but never set them too tight – a common mistake is that of allowing positions to run away to huge losses. Majority of novices start off buying and tend to forget and leave their trades untouched until it is too late and get their fingers or even more burnt. As you become a more mature spread better, you realise that you need to protect your capital as well by introducing stop-loss limits. At least in this way you know how much you could potentially make or lose. Also, keeping a regular check on your positions with related and unrelated news all affects investments adversely which even the experts can’t understand.
Don’t Overtrade!
- Rule #6 -Don’t buy and sell shares randomly!
When I started I remember I had got addicted to short term trading of the Silver, Gold and Oil markets. Big mistake! Started well and got hooked, especially watching the climb of Silver and attempting to play with the Middle East politics by trading Brent and WTI. Stoopid! Stick to what you know people, I have in past years, lost and gained and lost a fortune precisely 3 times.
There has been no shortage of trading opportunities in recent years, with the market volatility throwing up plenty of attractive potential bets for traders to cash in on through buying in the dips and selling on the highs. However, buying against a trend is dangerous. Trying to spot a turning point in the market is impossible unless you’re lucky. Also, you don’t want to be buying at the top of the market when everyone is about to unload. Do a bit of technical analysis before buying. See what the volume is like, how the market rises and falls on a daily basis..etc And never bet on shares in companies whose business you don’t understand!
- Rule #7 -Make rational decisions.
It’s a business. Trading on gut instincts alone is likely to land you in trouble at some point in your trading career and any trader who operates without a trading system may eventually fall victim to an act of oversight, misinformation, misunderstanding, manipulation, impulsivity or some other negatively impacting factor. To take better decisions you need to learn how to dissect the huge quantity of data and news that we are bombarded with on a daily basis. Here it is important to filter this data and take into account of only the more relevant bits of information.
The hierarchy of knowledge is as follows:
– Gut Instincts: This is an experiential and/or emotional filter that is many times unbacked by physical evidence. Having said that there are times when your instincts can be helpful particularly as you gain experience. My suggestion is practice to become very discerning.
– Data: This is the raw data made up of random facts or other inputs that taken by themselves are of little value. Making conclusions based on raw data alone is likely to result in flawed decisions.
– Information: This is more complete data; data that has been processed so has meaning and allows for better analysis.
– Knowledge: This is information that has been additionally refined by analysis such that it has been assimilated, tested and/or validated. You can make decisions on knowledge.
Most people tend to treat theory and opinion as fact when in reality they are not the same. Making decisions based on opinions can lead to bad decisions. Taking decisions based on gut instinct or data alone is quicker but risky. The best decisions are taken at the information level although these are still not as safe as those based on knowledge.
- Rule #8 -Don’t put all your eggs in one basket!
Diversify across multiple shares in different industries. Don’t put in more than 10% of your pot in one share. Likewise avoid putting all your entire cash balance on a single spread bet as this makes it more difficult for you to give up the trade should it fail. I happen to believe none us will succeed until we have experienced the pain of losing – the trick being to lose enough to hurt but not so much you are out of the game. Your primary objective should be to remain in the game. At the moment you might be lucky, two gigs and you will pay for your losses and the offending shares can gather dust in your portfolio. (for the record shares gathering dust in your portfolio is not the way forward unless they are rising.) Until you recognise that funding your trades from regular income is little more than going to the bookies you are unlikely to progress with your investing. Sure you will have some big winners, but will they pay for your losers? And can you cope with the emotions involved with the losers?
- Rule #9 -Don’t be impatient to enter a trade!
Trading on the stock market is about being patient with your investments. Patient investors are always rewarded – its the impatient investors who lose out. And if there is a quick rise in the share price wait for it to settle before buying, sometimes you miss out but then again you could be buying at the top when everyone is about to take profits.
Beginners tend to lose money as they feel they must ‘always be in the market’ and get ‘whipsawed’ all over the place. It’s much better to pick your spot using limit orders and wait for the price to come to you. NEVER CHASE THE MARKET. Spread betting is about making money and should not be used as some sort of hobby/fun pursuit. By all means treat it like a sport and approach it in a disciplined way but if you heart keeps racing when you’re in a trade it’s a bad sign
- Rule #10 -Don’t overtrade.
Going bonkers and trading many times in a day. When I started I fell myself for this. However, you learn from your mistakes, and I now always limit my downside risk and never make trades for the sake of it. The problem with spread betting sites is that they are addictive – the bookies want you to trade since they take a small cut every time you deal so they want to make it as easy as possible. Beginners tend to overtrade. Likely to end up in disaster. Keeping your capital intact is, for me, is critical. That means, do not over-trade, and keep things simple. Incidentally, whenever I attempt to use complex strategies I tend to lose money and when I use simple strategies I tend to perform better.
- Rule #11 -Never set your stops too close to an entry price.
For instance, it would be madness to place a trade on the FTSE by going long at 5100 and setting the stop loss just 15 points away. The FTSE is volatile, that stop is way too tight. Having said that avoid chasing the market; if you get stopped out, you’re wrong for a reason, this is no time to act macho and fall for the same mistake all over again.
- Rule #12 -Do not move stops further away from the entry.
The reason most people lose money, and yes, it is 80% of people…is because they lack the discipline to stick to stringent trading rules. They revenge trade. They lower their stops to avoid being stopped out. And they let poor performing positions worsen by refusing to give up. They break every rule in the book and they get wiped out. At school you have teachers to discipline you. With spread betting there’s no one but the market to punish you for your mistakes. Even the best traders have losses, the trick is in making sure that the wins are much bigger…
- Rule #13 -Concentrate on not losing money – not winning.
Be realistic – this will help you control your emotions which is a crucial aspect of spread trading. Do aim to move your stop to breakeven ASAP, also try to reduce your initial stake and scale into positions at no risk once they are in profit. Once in a trade, you should primarily look to protect your pot, get it to no risk as soon as possible – once you are in for no risk and your pot is safe, try and run it. I get stopped at BE a lot, but I try to see this as a good thing as my pot is unscathed!
- Rule #14 -Greed.
Keep it simple and stay away from the greed monster. To spreadbet successfully you really need to have the right temperament.
- Rule #15 -Not running profits..
Good positions should be held. No point in taking tiny profits and big losses.
- Rule #16 -Getting emotional.
Doing what feels right will not get you consistent, profitable results. Don’t fall in love with any share. The risk with liking a company is that when you see its stock price starting to fall, you find it very difficult to bail out. At first you stay in (it will recover, won’t it?) – then, when it continues to fall, it goes too far for you to want to suffer a considerable loss by selling out, so you stay in the hope of a massive rally. Just admit when you’re wrong and don’t hesitate to cut your losses. Reflect on why you decided to enter the trade in the first place. Were there mixed signals when you were about to enter the trade, did you consider the economic calendar, or perhaps you were distracted or plain unlucky?
- Rule #17 -Don’t listen to tips in investment and tipping magazines or from family members!
Be wary of tips from unqualified sources. Particularly those ‘hot tips’! I learnt very quickly that no matter how respected someone is, it is a very dangerous game to attempt to replicate their trades and I get the impression other people have suffered this same fate. Unless all trades are logged live with time/price and sells are updated immediately less experienced traders can get really stung.
I would never buy shares from a cold caller or similar source. Likewise using services like twitter to gain access to thoughts and opinions can be dangerous as there is likely to be a lot of market noise, and some broadcasters can post strong views which can be risky if you follow such trades blindly. I have spent several hundred pounds over the years buying investment books and weekly magazines such as Shares and Investors Chronicle but I still only use them as a starting point for my research. These are all stored for reference except the weekly mags which have been binned. Some of the trading share tips may sound attractive but always support them with your own analysis. Following their tips blindly is a surefire way to lose money; after all why should a stranger care to give you winning tips? Most of these tips have a hidden agenda behind them.
- Don’t listen to News CNBC or any other.
- Don’t listen to analysts ( well if you do just do the opposite of what they recommend).
It is not just the majority of personal investors that treat investing more like tombola, but also much of the popular financial press encourages this attitude. You can tell how fickle all this really is. News articles are now saying that it’s time to buy stocks for long term and etc. Only 7 days ago, they were saying it was time to be in cash and wait and see approach. And then the punters wonder why they get sucked into the market only to lose when the rug is pulled. Any quack knows to buy when everyone is selling and sell when everyone is buying. It just makes you laugh sometimes reading the crap that is published in news.
In fact, don’t listen to advice from anyone, use your rules and always follow them. Follow your own trading plan, otherwise you are just gambling. I only have one rule on when to enter the market and one to exit (followed up by some simple sub rules on when / if to take profits).
Likewise, don’t rely on word-of-mouth from family or friends. Just because a family member or a friend has successfully traded spreadbets does not mean that you will have the same experience. While it might be tempting to trust your family, friends or colleagues, it is always preferable to do your own research with spread betting.
In fairness I’ve been prepared to learn from my spread betting mistakes but then I don’t have dependents so any financial risk is on me.
“People who lack confidence in their own decisions look for people to help make them for them.”