Five golden rules for spread betting

Financial spread betting - which allows you to bet on what you think a financial market will do next - is growing in popularity. Angus Campbell of trading platform Capital Spreads explains some simple rules to help financial spread betters.

1. Keep your trading plan simple

It’s important not to complicate things, so stick to a simple trading plan.  This means knowing the markets you want to trade, how long you want to be in a position for and how much you are willing to risk. 

Taking these three points one at a time, firstly you should stick with markets you know and are comfortable with.  This means you should know them inside out, what they consist of, their trading hours, what influences them and ultimately getting research or information on them is paramount. 

Secondly, you need to know what sort of time horizon you are going to trade.  This will determine the way you trade. If you are looking to be short-term, you’ll being placing many trades within one trading day.  For medium term it’ll be fewer trades within a week or a month. If you are working on a longer timeframe then this will entail fewer trades again over a monthly or even yearly period. 

Thirdly, how much are you willing to risk?  This is crucial and links into other golden rules.  You are best off starting small and as you develop - and as long as you’re comfortable - then you can possibly increase your stake size.

2. Expect losses

You would be unrealistic to not expect losses.  Even the greatest investors around incur losses and it’s the first step to being able to control your emotions.  Each and every time you open a new position, you have to imagine it going against you, hitting your stop loss and you losing that money.  If you are comfortable with that loss, then you’re half way to controlling your emotions.  You must repeat this exercise every time you trade.  We always want to win, but you have to be able to stomach the losses both financially and mentally.

3. Don’t run your losses

This comes from the classic 80/20 statistic.  On the whole (and this statistic is backed up by numbers we’ve crunched on our own database), 80% of clients lose money trading the financial markets using leverage.  This is a staggering number.  But what’s more staggering is that clients have more winning trades than losing trades.  How can this be?  The answer is because the loses incurred on the losing trades are much bigger than the profits made on the winning trades and this is because overall clients will run their losses.  As human beings we hate to incur a loss, but we’re happy to run one in the desperate hope that the market will turn in our favour eventually.  If a client is lucky enough for this to happen, often they will close for a meagre profit.

4. Remain disciplined

Once you’ve got your trading plan sorted, now you need to stick to it.  Only if you have concluded that after a bit of time it isn’t working should to go back to the drawing board and start again.  When deciding on your trading plan, the risk aspect is very important and the main crux of this golden rule is that you should not risk the whole of your cash balance on one trade.

5. Do your research

Finally, it is important that your decision to place a trade is backed by some research you have done.  This means more than saying to yourself 'the market is too high I should sell it' or 'this share’s at a one year low, I should buy it'.  You need to do your home work, whether that’s studying the fundamentals of a market or the technical characteristics through a chart.  The more research you do, the more you’ll be able to analyse a trade afterwards if it went wrong and learn from it.