Financial Spread Betting is a powerful way to trade a huge range of financial markets. However, it’s high risk and without avoiding these 10 common mistakes it can be costly. From Hargreaves Lansdown Markets.
- Fools rush in
Too many people don’t understand the risks or understand how quickly markets can move. Before you start make sure you understand how spread betting works, how much money you are risking and be clear about what you want to achieve.
- Thinking it’s easy to make profits
There are many commentators, and undoubtedly other investors, who will tell you it’s easy to make money trading.
The reality is that all have made losses whilst learning how to trade. Overconfidence can lead to losses so it’s always advisable to carefully manage your expectations. Don’t assume you can sit back and just let the profits roll in.
- Risking too much on your first trade
Placing your first trade before understanding the trading platform and how much you are risking can be disastrous.
Take a tour of the platform before trading and understand how to set stop losses. Calculate how much you are risking and then start small and build up. Remember your primary objective is to make money, and so wait until conditions are optimal for achieving your objectives, then place a trade.
- Overexposure and trading markets you are not used to
Many experienced share traders open an account and start trading commodities and FX without conducting the same research as they would normally. When the market moves against them they ‘double-up’ and risk too much of their capital.
Do your research and stick to the markets you know. There is merit in diversifying, but only in markets you understand. Understand how a particular market works – what does a point movement mean in terms of your profit/loss?
- Cutting profits and running losses
When you place a trade you can set a stop loss which is an order to close your position at a level specified by you if the price moves against you. A common mistake is to keep on moving Stops further away so as to avoid getting stopped out. If you persist in moving Stops further away before they are reached, you are defeating the purpose of using them in the first place.
It’s tempting to take a profit too soon. Run your profits with the strategy of making your winning trades yield substantially greater amounts than the losing trades.
TIP: Set yourself target entry and exit levels. Trailing stop losses can protect your profits on a winning trade. Don’t liquidate a profitable position to fund a losing one. Use stop losses on all trades.
- Deviating from the plan
Creating a trading plan is important, but can quickly become fruitless if you deviate from the course you have plotted for yourself.
Define entry and exit points in advance. Setting yourself fixed target levels before you enter into a trade will help you to overcome the twin influences of fear and greed. You will need to define two exit levels: an exit point should things go wrong and an exit point for taking your profit when things go well.
As one of the most important rules to successful trading is to use stop losses, it is worth repeating – a stop loss will enforce your exit levels and will help cut your losses. Guaranteed Stops will protect you against even the sharpest adverse market movements.
TIP: Keep a trading log of previous trades. This will show you the results when you cut your losses and when you didn’t.
- Over-reacting to wins
Making a significant profit on a trade, or a string of trades can affect your perception of your trading skills and ability to keep the run going. This can often lead to a heavy loss on the next trade. There’s no such thing as a ‘winning streak’.
TIP: Immediately after a successful trade it’s worth pausing and not rushing in to your next trade without researching it.
Fear and greed can play a significant part of speculative trading.
Professional traders will not run their losses, but instead plan how much they’re willing to lose and set a stop loss. They will also plan their exit point for taking a profit or when to raise their stop loss to protect a profit. Sticking to your planned entry and exit points removes some of the emotion.
TIP: Use smaller trading sizes and use stop losses – if you’re panicking over every point move then you are risking too much capital.
- Being indecisive
Not being willing to act and letting a position run against you, or leaving it overnight in the hope it will have recovered in the morning, can be expensive. You need to be decisive, especially when markets are volatile.
TIP: Don’t be afraid of making the occasional mistake. If you follow your planned entry and exit points and manage your risk sensibly, you’ll soon learn the techniques needed to improve your chances of profitability.
- Not monitoring positions closely
Checking how big your profit is growing is a nice pastime, but people often don’t like watching their losses build and prefer the out of sight out of mind strategy.
When things are going badly you may have to act rapidly in order to prevent the situation getting worse. Make sure you have a stop loss set and are available should you need to be contacted to top up your margin.
TIP: Make sure you have enough available cash on your account to cover any running losses. This will avoid your position being closed out if you are not contactable to top up your cash balance.