Being prepared and well researched before you attack the markets is critical for anyone who is serious about succeeding in spread betting long term. It’s no secret, but yet still too many traders hit the markets with financial spread betting positions before being sufficiently well read in how the markets work and the techniques and steps to successful trading. We’ve put together a few key tips for spread betting traders who want to make sure they’re always at their most prepared, ready to trade dynamically and profitably to make the most of their capital.
Have A Plan Before You Start Spread Betting
When setting out to trade the markets, whether you’re a first time spread bettor or an experienced multi-disciplinary investor, a critical pre-requisite of success is the trading plan. Much more than just a trading strategy, a trading plan delineates an overall strategy, outlining what you want to achieve from how much capital, and exactly how you’re going to go about achieving it. Its importance is as central as that of the business plan to a start up, and without having the plan in place holding yourself accountable to targets and keeping an eye on the bigger picture is near impossible.
Why Have A Trading Plan?
A trading plan is a blueprint on which you can base your trading activities. If your plan shows you need to make a 10% return on your investment and you’re sitting at 11%, you know you’re performing above target. If you’re down at 5%, you might want to adopt a new trading strategy, or explore opportunities in other markets. These prompts to action take a while to imbed if you’ve nothing to cross-reference against, and in the process of drawing up your trading plan and monitoring your progress accordingly, you can help to more efficiently identify whether you’re trading along the right lines.
But a trading plan is much more than just a counterpoint on which you base your trading. It’s a guide, a roadmap, guiding you towards your end goal. For some, that’s making a full-time income (and then some) from spread betting alone. For others, it’s part of a wider trading and investment strategy. Or you might even just be looking towards a few points a day for a bit of extra pocket money. Whatever your trading goals and objectives, a trading plan helps keep you on the right track, and divert you along the often-bumpy road of spread betting in order to meet those aims. Without it, you can expect limited success, particularly long-term, because the lack of the focus it provides can easily blow you off course.
How To Draw Up Your Trading Plan?
Drawing up your own trading plan requires a bit of preparatory research. First of all, you need to think about your trading objectives. Why are you trading? What are you going to trade, and why? Is spread betting an exclusive trading medium, or are you also interested in trading CFDs or other instruments? These decisions are essential in shaping your plan, and in providing some form of structure to your trading.
Secondly, and equally as crucially, you should have a think about the types of strategies you’re going to use. Are you trading ultra-short term, or comparatively long-term? Check out our section on spread betting trading strategies for more information on the most common approaches to spread betting.
Spread betting without a trading plan is a lot like driving without directions, and while you might eventually stumble upon your destination, your route will be inefficient and potentially very expensive. While most traders are urged on by the excitement of jumping in two feet first, and getting started on the markets for real, taking the time to draw up a trading plan, and to decide on the strategy and techniques you’re going to use to get there is not only a good exercise, but also a highly useful companion as you launch your trading career.
Dangers of Over-Trading
When it comes to spread betting, traders tend very easily to get caught up in the idea of highly leveraged earnings. As a result, a number of common trading errors are made, most notably over-trading. Over-trading happens when traders open too many different positions at one time, eating in to their capital and posing cash flow difficulties in covering losing positions.
For example, a trader might up his exposure to different positions to account for 50% of his trading capital, in the belief that this will result in a substantial pay day. Unfortunately, this often leads to problems when positions inevitably head south, and without the trading capital to offset these losses, traders can quickly end up in hot water.
Over-Trading and Over-Leveraging
Over-trading and over-leveraging are two distinct problematic scenarios that can arise through greed and a lack of foresight. Over-leveraging is where a trader enters a position too heavily, staking an unsustainable amount per point which can then multiply as markets move in an undesirable direction. This can quickly eat into trading capital, and spark off a downward spiral of chasing losses, which seldom yields positive results.
Over-trading, on the other hand, is where the trader invests too much of his trading capital at any one time, thus tying up too much capital. With too many positions and potential liabilities to cover, this can leave the trader needing to deposit more money to cover his liabilities and can lead to the exact opposite effect of the intended consequence.
Bear in mind that no one takes these decisions with the intention or knowledge that they are over-trading – they are simply taken with the possibility of earning significant returns on multiple different positions, and don’t keep sufficient capital in reserve to cover for every eventuality. When trading in any highly leveraged medium, keeping sufficient reserve in capital is essential to cover wayward trades, and to keep your head above water if things don’t quite go to plan.
How to Make Sure You Don’t Over-Trade
The first thing you can do to prevent over-trading is to think about your overall strategy. Spread betting doesn’t require you to smash it out the park to become successful. If you can earn a 1% return a day, you’ll increase your money by over 33% in one month, and you’ll have more than doubled your pot after 90 days. That’s at 1%. Try getting those returns from the bank.
This doesn’t require you to be over-leveraged – a secure, steady rate of growth will quickly mount up to add to your account, while helping to minimise the risks of having too many, too heavy positions. With just a few careful, thought out positions of a sufficiently small size to protect your capital, generating returns in the ballpark of even just 1% can be an extremely profitable way to trade over time. Don’t get greedy – by trading within your limits, you can make more in the long run.
One of the tendencies for traders when dealing with leveraged investment styles is to over-leverage. In spread betting, this takes the form of placing a wager that’s far too high in comparison to the total trading account size, and it’s all too common for traders to want to make the most money they possibly can in the shortest period of time possible. Succumbing to greed is a central reason why traders fail, and it can cause all sorts of problems in a matter of minutes when you’re too highly leveraged. So how should you best handle this double-edged sword, and at what level should you be trading to keep within safe limits?
As a rule of thumb, you shouldn’t be trading any more than between 0.1% and 0.2% of your total trading account per point on any one transaction. This builds in enough scope to allow you to place multiple transactions and for some of those to work against you with less than devastating consequences, while also taking account of the need to preserve your capital for the medium term. This is especially important when you’re just starting out in your trading career, because there are no guarantees that you will earn more than you lose in the early days of your spread betting journey.
Whenever you’re deciding how much to bet on a particular transaction, it’s vital to bear in mind how spread betting transactions are calculated. Your stake is multiplied by the difference between the price at which you entered the position and the price at which you closed the position (either voluntarily or involuntarily, courtesy of the broker cutting their own losses while they can). So, a 10-point movement means 10x your stake, in either direction.
Because of this inherent structure in spread betting as a transaction, it is important that you make sure that you have enough breathing space within your account to avoid running into difficulties if one or two positions fall into the red. For an account that is overleveraged, with transactions account for 5%, 10% or greater of the investment capital available, it only takes a slight blip in a market to cause serious problems.
A common misconception for inexperienced spread bettors and other leveraged investors is to assume that losses are somehow limited to the amount available in deposit. So, the logic goes that if you invest £100, the most you can possibly lose is your £100. With share dealing, this is generally the case, and your liability stops when your shares become worthless.
However, for leveraged spread betting, you are actually liable for the total extent of your losses, whether that’s more or less than your available balance. If its more than the amount you have on balance, you might notice that your other positions are closed automatically as the broker tries to claw back some of your debts. If your open positions are insufficient to cover your liability, you might find you get pursued in the real world for the sums you owe.
This is why it is so important to keep a panoramic perspective of what leverage can do – it can win you a lot of money, but it can also cost you your car, your possessions or even your family home. Don’t get greedy and push for the sky – while you might hit the big time, you’ll be dicing with your total worldly wealth, however large or modest, in the process.
Extra Spread Betting Techniques and Tips
Read The News Throughout The Day
Reading the news is one thing, but keeping up to date with developments and current affairs as they change and progress throughout the trading day will help prepare you more thoroughly for sudden market shifts, and can provide you with vital knowledge to identify potential opportunities before they arise. In order to compete in the markets, you should aim to compete on knowledge, and there’s simply no excuse for a lack of preparation – by keeping a constant eye on the world and market news, you stand a better chance of finding and exploiting new, lucrative opportunities.
Read Analysis From Different Perspectives For Balance
Political and economic analysis is seldom conducted with true independence and a lack of bias. The judgement of commentators is always skewed by one factor or other, and it’s important from the point of view of balance that you read and research a wide cross-section of opinion. The more perspectives you hear, the more likely you are to be informed about particular events, markets or opportunities, and more strategically poised to take advantage as a result.
Plan For Key Events In Your Market
Key economic and market events like profit announcements, interest rate decisions and GDP figures all have a significant bearing on the financial markets, and can send the markets into a spin depending on how these announcements tally with analysts forecasts. While these powerful announcements can heavily influence markets and shape the way traders engage, they seldom come out of the below. Make sure you calendarise everything you can find that might be relevant to your markets, and pay attention to what commentators and other traders are saying in the run up to them. This will give you the best advanced notice of how the markets might respond, so you can plan to be on the right side of the market when the news breaks.
Study Price Data
Macroeconomic price prompts and current affairs that relate to markets and trader confidence are all powerful indicators of movement. Yet it would be unwise to consider price factors to the exclusion of macroeconomic factors and vice versa. In order to achieve the whole picture and be as informed as you can be, it’s vital to be knowledgeable on both the market and the macro front – i.e. know your price points, know your strategy and know what’s going on in the world around you that might influence your trading calls.
Trading research and preparation takes up time, but it should never feel like a chore. Getting up to speed on the markets and the various happenings will make or break your success eventually, so it is critical that you pay sufficient attention to this precursory planning phase as an important part of making the most of your trading. By immersing yourself as widely as possible in market chatter, opinion and resources, you stand the best chance of being well prepared to leverage any opportunity.
Spread Betting Tips Conclusion
These financial spread betting tips were drawn up by using the experience and feedback of spread bettors. Lack of plan, over-trading, and over-leverage are the main reasons why many spread bettors lose and leave the field of financial spread betting. Financial spread betting is risky and should be treated with respect; keeping leverage under control and sticking to a plan will go a long way towards improving your trading experience and, more importantly, return on investment.