Here are some trading tips and mistakes to avoid when spread trading. Achieving success in spread trading often requires avoiding numerous pitfalls more than seeking out and executing winning trades.
- Know when to cut your losses – The first thing to think about is your exit point. At what point do you get out with a manageable loss? Some traders just don’t know when to throw the towel, hanging on as their bank account become increasingly battered. Like desperate gamblers, some will even increase their bets in the hope of making up lost ground.
- Always use a stop-loss – Individual investors can limit any damage by attaching a predetermined stop-loss to a trade, taking the emotion out of the decision to sell when the price moves against them. However, be careful not to place your stop losses too close. Be familiar with how volatile the market is and set stop-losses or risk parameters accordingly.
- Set a profit target – Weigh up the potential rewards as well as the risks. If you are willing to lose a certain amount on a security, you should also be convinced that there is enough potential profit to be made in the first place. If your profit target is consistently closer to the starting price than the stop-loss, then you have a problem.
- Avoid over trading – Excessive buying and selling can eat up any gains made in trading fees, commissions or bid-offer spreads. If you find yourself overtrading take a break. The markets will always be there, so it doesn’t do any harm to take a couple of weeks off from trading and think about where it went wrong.
- Keep emotions in check – Greed is easy to understand, but ego can be just as dangerous: many rogue traders start by trading to cover up small losses. The trick is to learn to curb your emotions so that they don’t cloud your trading judgement.
- Take notes – In my early days I made a note explaining the reason for placing each trade. It helps since you can then review the trades on the cold light of day and see if there’s a common mistake you’re making.
So what are some of the more prevalent mistakes that traders make? In no particular order of importance:
- Failure to have a trading plan in place before a trade is executed. When you enter a trade, you should know when or where you will exit the trade or how much risk exposure your account has. It’s your trading business plan.
- Inadequate tools or resources to develop a trading plan. Jumping into trading may seem easy but, to be successful, you need education and reliable tools to understand relationships among markets and to develop a sound decision-making process based on clues and strategies provided by a trading tool like Sharescope.
- Inadequate capital assets or improper money management. You can trade successfully with almost any size account, but you need to size your trade to the size of your account. Don’t over-trade with too many markets or positions and don’t gun for those highly risk “home-run” trades that involve too much trading capital at one time.
- Expectations that are too high, too soon. You can’t become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance; trading futures is no different.
- Failure to use protective stops. Protective stops aren’t perfect – no money management tools in futures are – but they give you an idea how much money you are risking on a trade, should the market not act as you expect.
- Lack of “patience” and “discipline”. Don’t trade just for the sake of trading or because you haven’t traded for a while. Let those very good trading setups come to you, then act upon them in a prudent way.
- Trading against the trend or trying to pick market tops and bottoms. Sure, you want to buy low and sell high (or vice versa), but the best advice for most traders is still to trade with the trend.
- Letting losing positions ride too long. Successful traders do not sit on losing positions for long. Instead, they take their losses (usually minimal) and move on to the next potential trading setup.
- Failure to accept complete responsibility for your own actions. Don’t blame your broker or the market or something else for a losing trade. You make the trading decisions; you are responsible for your own success or failure.
- Not getting a bigger-picture perspective on a market. Look at a longer-term chart than the period you are trading to see what history says about your market. This puts current market action in the context of overall market action.
You will find that if you follow these rules, odds are that your spread trading account will appreciate you!
Of course, none of these rules will remove the risk from trading. Trades at the end of the day are bets and you should try to bet based on your knowledge, your ability, your expertise and every piece of information you can glean. You don’t need to take on massive levels of risk. Yo can still trade with a relatively relaxed, no stress approach, which is recommended.