Spread Betting – 10 Important Rules

Trading the markets is highly competitive and requires a lot of learning and practice. The odds of making a profit can be improved significantly by using a methodical approach and understanding the risks that often lead to losses. One popular type of trading is Spread Betting, which gives traders the opportunity to take leveraged positions. This approach offers the opportunity for much larger gains, but it also magnifies potential losses.

Here are ten tips to improve your odds of success when Spread Betting.

1. Cut losses early

This cannot be stressed enough, with large losses presenting by far the biggest threat to any trader’s account. If a trader keeps their losses to a minimum, then the number of successful trades they will need to reach profitability will also fall. Since Spread Betting involves leveraged positions, losses can multiply very quickly. Letting losses get out of hand is a common mistake made by novice traders. It is human nature to struggle to accept taking a loss – it naturally induces a feeling of failure – but it is essential to overcome this emotional response.

2. Limit position size

In Spread Betting, leverage gives traders the chance to scale up their positions with a significantly smaller cash balance than other types of dealing. Therefore, position sizing becomes a paramount concern as potential losses are also multiplied. Risk management is an essential part of trading. Indeed, it is important that a trader is aware of the potential downside that may result if their leveraged position goes against them.

3. Make a trading plan and stick to it

Not having a rigid trading plan and allowing emotions to affect decisions is a common mistake for beginners. Traders who find themselves trading for the sake of it may just be gambling. A trader’s biggest demons are usually fear and greed, so reducing their impact on trading decisions is vital. It is possible to remove emotion from decision making by planning entry and exit points – both in the event the trade is successful or if it does not go to plan.

4. Avoid over trading

A trader must have enough time to manage their investments effectively. It is not advisable to be invested in too many different stocks at any one time. Over-trading will result in transaction costs mounting up quickly and there is also a stock’s spread to consider. The spread is the difference between the asking (buy) price and the bid (sell) price. This figure is particularly important when trading small-cap stocks because illiquid firms usually have wider spreads. Trying to trade a stock’s volatility can require considerable effort, with any gains offset by the losses made on the spread with each transaction.

5. Diversify your portfolio

Holding a large proportion of a portfolio in any one stock or financial instrument is very risky. As well as managing position sizes on a stock-by-stock basis, it is also important not to have too many investments in the same sector. For example, holding a portfolio consisting purely of oil stocks will likely expose a trader to considerable downside if oil prices decline. Mis-managing the sizing and diversification of an investment portfolio can also cause considerable stress to a trader. This can have a detrimental impact on their decision-making and general well-being.

6. Use a mix of fundamental and technical analysis

Understanding the fundamentals of a company is crucial in identifying potentially rewarding investments. The knowledge can also reaffirm a trader’s belief in a position, should it be tested by share price volatility. A complimentary skill is to be able to use technical analysis to identify good entry and exit points on a share price chart. Waiting for the price to hit an identified support level before buying dramatically increases the chance that a position will get off to a good start. In turn, this maximises the potential reward and minimises downside. It also allows for stop losses to be placed closer to the entry price, beneath the support level. Likewise, identifying potential selling zones not only helps with taking profits but can also ensure a trader avoids entering a position with substantial downside risk. For a more risk-averse strategy, traders can enter positions once confirmation of a move is received.

7. Carefully consider stop-loss placement

Stop losses are crucial in risk management to protect capital. A trader should ask themselves at what price a trade will have become unsuccessful when considering placement of stop losses. This usually involves identifying strong levels of support. However, it is also important to keep in mind that, at times of increased market volatility, these levels can be temporarily broken with a subsequent big move in the opposite direction. It is essential to allow for these moves and avoid setting stop losses too close to current price action.

8. Identify what works

Psychology plays a big part in making successful trades. The more autonomous a trader can be in their decisions, the less likely they are to fall foul of emotional-based responses. Every day there are numerous opportunities to trade. A trader should try to hone in on what works for them. It might be that they find certain financial instruments or stocks that suit their trading style, or that specific technical analysis patterns give the best consistent results.

9. Keep a record of trades

It is easy to remember the wins and become convinced that some mistakes were purely a result of market conditions. The reality is that every trader should take responsibility for their trades, and learning from mistakes is essential in fine-tuning a personal trading style. Keeping a record and analysing trades will furnish a trader with invaluable information about both their mistakes and their strengths.

10. Identify the Risk/Reward of a trade

Some experienced traders will openly admit that less than 50 per cent of their trades are successful. The reason for this is that they adhere to a trading plan that ensures they can be right less than half the time and still make a profit. This can only be achieved if losses are cut early and upside is maximised. An experienced trader might only have two winners in every five trades, but the winning trades will be sufficiently profitable to make up for the three small losses. One example of improving this risk-to-reward factor is entering a long position near a support level. This maximizes potential upside and minimizes the chance of heavy losses through the use of a stop loss just below support.

When spread betting, as with all kinds of trading, it is essential to understand the mindset required. Discipline, level-headed composure, and a tried and tested approach are crucial components for improving the chances of success.

Author: Stuart Langelaan

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