Financial spread betting requires an innate understanding of the markets. Too many new traders rush into the spread betting arena to dabble in the financial markets without the requisite knowledge. One of the easiest ways to limit your losses in financial spread betting is to reduce the investment per trade.
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Financial advisers caution against large speculative wagers on individual trades for new traders. In fact, the ideal trading size per point is £1. The goal is to acclimate oneself to the trading platform and the market conditions before risking too much capital on individual trades. Most new traders make the mistake of going in too heavy upfront. This is a recipe for disaster.
On a similar note, traders will want to be mindful of the specific trade amounts on financial assets. When there is significant market volatility and the markets are trending, it makes sense to increase the size of the trade if the attendant risks are low.
However, if there is high volatility and high-risk, it makes sense to decrease the trade amount. When the stop loss is smaller, and there is higher profit potential, spread bettors will want to increase the size of their trades.
Don’t Buy Trading Systems Online
The internet is awash with charlatans claiming to know the best strategies for spread betting, binary options trading, or shares trading on Wall Street. The truth is there is no single best strategy to adopt and anyone claiming as much is dishonest.
There are ways to become a better trader by learning the ins and outs of the financial markets. These include attending seminars, webinars, reading blogs, and following successful traders. It’s easy to conduct research about potential scams, and if somebody is selling a system that has been flagged don’t go there.
Trade Financial Assets That You Understand
As a new trader, your enthusiasm to generate profits may get the better of you. However, check yourself before you wreck yourself by only trading in one or two markets that you understand. Spread betting companies offer hundreds of financial assets across multiple categories. It is difficult to start spread betting without any prior knowledge of the financial markets.
Many people begin by trading their favorite currency (USD, GBP, ZAR, AUD, CAD), their preferred index (Dow Jones, FTSE 100, NASDAQ, CAC 40), or a commodity they understand such as gold, silver, or crude oil. The best traders in the world always specialize in a handful of assets, or a specific asset category.
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That’s the only way you become adept at understanding market movements and the factors that influence prices. By narrowing your focus to a specific financial asset or asset group, you will acquire pertinent knowledge to make informed trading decisions.
Money Matters – Scrutinize the Costs
Any financial activity needs to be evaluated according to its cost structure, and profit potential. If the costs are too high, the profits are going to diminish. In much the same way, spread bettors will want to be cognisant of the bid-offer spread and the commissions at spread betting companies. Fortunately, there are no commissions with spread bets, but the real cost factor is the bid-offer spread.
That’s where many hidden charges affect traders and decrease their profits. It is important to realize that many day traders tend to incur increased costs and decreased profitability overall. The more you trade, the more difficult it is going to be to realize a profit.
On the same point, many novice traders believe that the winning trade percentage is the most important metric to go by. For example: If a trader wins 80% of trades, is he or she profitable? The answer depends on how much the trader lost with 20% of the trades. For example, if you traded 10 times and won 8 trades valued at $2,500, but lost 2 trades valued at $3,400, you have made a net loss of $900.
Learn to Use Trading Tools like Stop Losses in Your Spread Betting Activity
Markets are finicky, and likely to reverse direction at a moment’s notice. For this reason, trading platforms now feature stop losses. Simply put, a stop loss stops the hemorrhaging from your account. When markets are moving in a negative direction, you will want to end the trade before expiry time.
A stop loss is the single best way to limit your losses. Unfortunately, an asset may initially lose value and then reverse while your stop loss kicks in. The numbers are unequivocal: stop losses have saved countless traders from financial ruin.
Be Mindful of the Emotional Aspects of Trading
Emotions have a powerful part to play in trading activity. For the most part, emotions are detrimental to trading since they cause automatic reactions to market movements. It is important to know when to buy an asset and when to sell an asset, but the emotional component cannot be discounted.
Successful spread bettors tend to believe that 10% of their success is derived from the right methodology and 90% from mental acuity. If emotional interference governs our trades, we will be better served by reducing the amounts placed on individual trades. This reduces our overall exposure to loss.
This article was written by Brett Chatz a contributor to spread betting broker comparison website, spreadbettingreview.co.uk.