Financial spread betting is high risk. For this reason, irrespective of your ability to place stop losses and forecast the market direction correctly, spread betting with any kind of frequency irrevocably means that you will incur losses from time to time – more likely sooner rather than later.. On a longer term basis, however, what matters are not the losses but the way you react when underwater and whether you are able to learn from your mistakes so as not to commit them again – or better yet try to learn from other people’s mistakes so they don’t end up hurting your bank.
“Spread traders who tend to do best are not necessarily the ones that run their profits, but those who exit losing positions as quickly as possible.”
Education costs money-the lack of it costs even more and you are right in that it makes sense to have an ‘edge’ before embarking on trading, but you won’t know this until you have some ‘skin in the market’ as trading is 95% psychology. Naturally, no one likes making mistakes, especially when you lose money doing so. This is a feeling that most spread traders are all all too familiar with. But take heart, much as Winston Churchill once once said: ‘All men make mistakes, but only wise men learn from their mistakes’.
Mistake Number One: Riding your Losses
It is not always easy for a financial spread bettor to admit that they’re wrong and they’ve made a mistake. When the market starts moving against you, it is very easy to convince yourself that the situation will sort itself out and that your position will soon recover and will soon turn around to put you back in spread betting profit. After all, you entered that spreadbet for good reason. And so, the more the market moves against you, the greater the likelihood that the market will stop falling, and the greater the possibility of your spread betting position coming back eventually, surely!? Besides, now your spread bet is already heavily underwater, what difference would a little more make?
One common mistake is to trade against the trend. Human nature is such that when you see a market going up you are likely to be tempted to sell it – and buy one that is falling like a stone.
This way of thinking can turn small spread betting losses into serious losses that will heavily impact your trading capital. Sure, sometimes the market will recover and your unrealized loss will come round, however unfortunately this may happen only after the stock market has already reached a point where you simply can no longer afford to keep the trade running.
A good trader would have put into place a rational system in place with trade entry, exit and stop loss even before opening the trade. You shouldn’t hesitate to cut losses at a certain pre-determined level and you should never move stop loss levels further away from your original planned stop exit. Ultimately, preventing emotions from interfering with your trades will not prevent losses but will help you reduce their impact on your bank balance.
Mistake Number Two: Not Thinking About Why you Lost Money
Ok, granted, after losing money on a trade the last thing you want to do is to do a post-mortem on how you could possibly have been so wrong!? It just feels like you are beating yourself up. But a loss in some cases is more valuable to your spread betting education than a profit. Do not just consider it as ‘bad luck’ and move to the next trade; think about what really happened. Here it is sometimes best to sit down and write your thoughts with a notepad – try to analyse what went wrong. This way there’s a good possibility that you won’t repeat the same mistake over and over again. Did you move your stop loss? Do you really research the stock? Did you let your profit run for far too long? Were there any hints or signs that might have helped you stop the trade earlier? It is always better to endure the displeasure of scrutinizing your own error than to waste money by committing the same error repeatedly. Good record keeping allows you to spot patterns in your trading that you wouldn’t otherwise see. By understanding what went wrong in a trading setup you can further improve your spread betting system to make it even more effective.
But how do you think the mere act of keeping detailed records causes superior trading decisions?
For me it goes hand-in-hand with whatever system I’m trading. For a while last year, and now again after the recent falls, I’ve been buying on weakness and selling on strength. To do this I need to accurately record buy and sell points to ensure I am disciplined. This means trading according to my system and not getting side-tracked by too much gut-feel. So for example my system might say take a 100 point profit whilst my gut might try to encourage hanging on for another 100 points. Record keeping helps me ignore the gut.
At other times I might trade on gut-feel and in these cases record keeping eventually tells me how good my gut is and whether I should rely on it in the future. Without good record keeping it is way too easy for us spread traders to fool ourselves into believing we are doing better than we actually are.
Good record keeping allows you to spot patterns in your trading that you wouldn’t otherwise see. For instance -:
- Keep getting stopped out on Cable right before the big move? Time to widen your stops.
- Trades taken on a Friday afternoon consistently losing? Stop trading that session or even better, fade your system at that time.
Another great benefit is that every few months you can review all of your trades with a different exit strategy to see how to maximise your expectancy.
To conclude, losses are part of trading, and making money spread betting is as much about minimising losses as it is of maximising and running profits. So learn to accept losses and make them part of your spread betting education.
As Winston Churchill once said: “All men make mistakes, but only wise men learn from their mistakes” For a reliable loser, the road to riches is simple: sell every time you want to buy, and conversely 🙂