Top Tips for Spread Trading Success

Spread trading has soared in popularity by offering people the chance to enjoy bumper returns through predicting everything from stock market movements to the outcome of sports events, but it is certainly not for the faint-hearted. While thousands of people have made handsome profits from their chosen trades, it can be just as easy to lose a small fortune by failing to research the area in question or not paying enough attention to the terms of the bet.

So how can you improve your chances of success? What are the secrets of the spread betting world that will enable you to limit your downside risk while enjoying involvement in an exciting and potentially lucrative world? We consulted a string of leading spread trading firms and participants for their help in putting together a 12-point guide of cautionary tales. Following them will not guarantee you make big money – but it should help you avoid major losses.

Here are a few spread trading tips to improve your chances of success at spread trading -:

  • Choose carefully

Don’t be fooled into thinking all spread betting firms are the same. Each one will offer a range of different tools to help you make trades, so look at what is available and find out the amount of assistance each offers. Is the firm easily contactable? Can you understand their terms and conditions? Are they willing to give you advice? See, for example, if they offer any online tutorials or seminars which you can attend.

  • Understand your market

Choosing a spread betting firm is important but so is knowing the market in which you want to be involved. For example, do you prefer following the larger FTSE 100 companies? It is essential to understand the market in which you have decided to be involved and how the size of the unit being bet is measured. You will also need to be clear about when the bet expires and the final time the contract can be traded. Failing to grasp these basics can result in heavy losses being sustained.

  • Know how much you are risking

One way of protecting yourself is by putting stop losses in place, which are instructions to deal if the price becomes less favourable. This means they are protected from losing anything more than a pre-agreed amount. Some spread betting firms adopt a policy where by if someone has lost more than a certain amount on a position, it will be closed automatically.

  • Consider limiting your potential downside

How much can you truly afford to lose? No one should get involved in any type of investment without a good idea of their tolerance to risk., according to James Daly, an investor centre representative at TD Waterhouse. “People sometimes struggle to get their heads around the idea that they can lose substantially more than the minimum deposit they are asked to put down to open the position,” he says. “They need to consider the maximum loss that they could take from the bet.”

  • Adopt a diversified plan of attack

Another way of limiting your overall risk is to have exposure to a variety of different markets. Having five or six different bets on the go should help prevent you making the mistake of having all your eggs in one basket. As part of this overall planning, consider your profit goals over certain periods, what size to trade at any one time, the maximum losses you are prepared to endure and the various entry/exit points.

  • Set realistic trading targets

A common mistake is trading too regularly. People may trade too often because they are looking for a trend that doesn’t actually exist. Perhaps most importantly, do not use your entire margin up with a single opening trade and always have a little extra in reserve to cover your position should it go against you.

  • Avoid being a sheep

It can be very easy to get carried away by market rumours or hot tips from friends that have been involved in the area for a number of years but treat every such piece of information and advice with caution. Only make a trade if you have done the research and formed a judgement. Do not rely on someone else’s opinion in the potentially mistaken belief that they have a greater level of insight.

  • Don’t be careless

Investing can be challenging enough without making it even more difficult for yourself so pay attention to what you are doing. It may come as a surprise but there have been no shortage of people that have bought the wrong company after having got their stock codes mixed up. It can easily happen so check and check again.

  • Be wary of scalping

This is a high risk spread betting strategy. Scalpers are those that trade regularly over very short periods of time – sometimes a matter of minutes. When they see prices move on the basis of news or some other market noise they will often attempt to benefit from that upswing with a high bet. However, although profits can be higher, it is a riskier approach because your potential losses will also be increased. The key if you decide to pursue such a strategy is to have a very tight stop loss in place.

  • Keep an eye on your positions

Spread betting is not like other areas of investment so you need to closely monitor all your trades. You can’t put money into them and then go away for a couple of days. You need to be watching them most of the time. Things change very quickly in markets, which is why you have to be on top of such developments. Keep a particular eye on trends and establish how strong and sustainable they are likely to be over the coming months.

  • Don’t Average Down

Never try to catch a falling knife: When prices start to fall there is a temptation to average down – buy more of the same at prices less than the original purchase cost in the hope of cushioning losses. Don’t. Research shows that most people who average down lose money by doing so. Far better to average up by adding to a winning position.

  • Lose a Loser

I’ve never met an experienced trader who has not at some time been badly burned by failing to ditch a loser, so be prepared to quickly admit it when you have made a mistake and cut losses. Do not let your heart rule your head. Know when to get out of a position that has performed well. There are two factors that particularly affect spread betters: fear and greed. There is either the fear of losing money or the greed that comes from letting a position ride to see how much more they can earn. We would usually recommend that someone banks any profits. Many people try to catch all of a particular trend, but that is virtually impossible. Gains have to stop at some point and if you hold on too long, you will be crying over something you have lost rather than something that was never yours in the first place.

  • Don’t get depressed by losses

No one can get it right all the time – even the most experienced spread betters with a detailed knowledge of financial markets – so get a perspective on losses. Analyse where you went wrong and what you could have done differently. Think of every trade you make as a building block in your knowledge. In that case, when similar situations present themselves in the future, you will have a better chance of knowing how to react to make a profit

  • Sleep well

Sounds trite, but we are not all the same. There are those to whom risk is anathema. No matter how much effort they put into research and how carefully they validate the basics of a company, they will being to worry as soon as they buy a spread bet. They will suffer from insomnia, headaches and probably panin. If you fall into this category, please don’t put yourself through the agony and forget leveraged trading.