Common Spread Trading Mistakes to Avoid

Don’t think that you are not going to make spread trading mistakes, even if you’ve been paying attention to everything that has been said. People vary, but some people cannot even learn unless they make mistakes, while others pride themselves that they have done their homework, don’t expect to slip up much, and still make errors. Certainly, costly mistakes usually result in a lasting lesson, and it is your challenge to try to avoid repeating any.

But there are some things that many inexperienced spread traders do, and if you pay attention to these that will eliminate a lot of problems for you. All of these items have been mentioned before in various parts of the guide, so you can use this section as an aide memoir.

  1. Always use a stop loss. I don’t care if you believe the stories and distrust your spread betting provider so that you do not put your order online, but simply have a note and watch the prices carefully; or if you take the simpler route of placing the order directly with your spread betting company when you open your position. Either way, you must have a stop loss position whenever you open a bet. Certainly, some of the time the bet will turn around after you’ve exited, but do you really want to chance losing two or three times as much by letting it run? Believe me, it is much more painful to exit, but even more necessary, when your losses have built up.
  2. Don’t set the stop loss too close. Despite the first common mistake, you also do not want to exit a position which is still reasonably viable, something that you would have looked at before entering the bet. Prices fluctuate, and if you set your stop loss too close you run the danger of being stopped out of most of your bets before they have a chance to prove themselves. Don’t be tempted to achieve a good looking risk-reward ratio where the rewards are low by giving yourself an unrealistically small downside, which nine times out of ten will kick you out of the bet whether it was right or not.
  3. Don’t over leverage. Sorry, but I can’t repeat this too often. You are looking to spread bet for the obvious reason that you can leverage your money with the gearing that it gives you – a great advantage over simply buying or selling stocks. Great idea! But it is a two edged sword that must be respected if you are to survive in the game. Always keep an eye on what your cash exposure is if everything crashes, and make sure you are comfortable with it and can cover it with your funds. Don’t think it couldn’t happen to you.
  4. Don’t over trade. It’s true that the biggest losers are those who bet the most often. Don’t stay up half the night, placing bet after bet trying to get back your losses of the evening. Not all betting sessions will finish in positive territory, and your task is to ‘live to fight another day’. The market cares nothing about you, and will not respect your wishes.
  5. Cut your losses quickly. Not to be confused with the general advice of using and adhering to a stop loss, bear in mind that you can always close your bet if it becomes obvious that it’s on the way down to your stop loss level. Maybe an indicator which you relied on has suddenly reversed, taking away your reason for making the bet in the first place. Why wait to watch it go down? The successful traders are the ones who keep their losses to a minimum.
  6. Don’t be too quick to take profits. The other half of the trader’s saying, “letting your winners run” is also important for you to the maximise your profits. Particularly after a run of losers, it may be very tempting to bank a win as soon as it seems a reasonable amount. If it’s still going up, why not just set a trailing stop to protect most of your profits? (Chapter 6 – trends tend to continue)
  7. Don’t get emotional. If you find you are shouting at your computer and blaming everyone else for your losses, then it may be a sign that you are getting too emotional about your betting. Keep a calm and dispassionate view toward your bets, and don’t fall in love with a company that is letting you down, even if you love their products. Most companies can’t keep going upwards all the time.
  8. Stay aware of the trend. Most of the time, by definition, a price will be going in the direction of the trend whether it is up or down. Sure, you can look for reversals in the signals, and be ready to play them, but it is usually a mistake to anticipate them – you need to see some signs of the reversal taking place, rather than just expecting and hoping it will happen. One of the danger times is when you have been following a price for some time in a steady trend. It’s tempting to think that the trend just can’t continue, and make an opposite bet, in anticipation of a retracement. Believe me when I say that the trend can continue longer than you can remain financially solvent.
  9. Stay away from relying on other people’s systems. It’s obvious really, but the copy writing is so good that we all get tempted. If the exaggerated claims were true, why would the guy sitting in his office in Slough be wasting his time selling it to you, rather than using it? ‘I’ve made so much money with it, now I just want to give back to regular folks’ is not an acceptable reason! I’m not saying you cannot learn by looking at other systems than the one you are trading at the moment, and I’m a believer in continuing education – but don’t think that any system is guaranteed, and don’t over bet on the basis of it. Doubly so if it’s a ‘black box’ system that you don’t know how it works.
  10. Focus on preserving your capital. As opposed to concentrating on making money. My friend Stuart McPhee, in his book Trading in a Nutshell, puts it best. – “Your primary aim is to preserve your trading capital”. You should not focus on making money so much as preserving what you have. Most traders focus on profits, but the successful ones focus on minimising their losses, and following their plans. If your trading plan has been properly written and checked, then the money will come just by exercising the plan diligently.