Losing At Spread Betting

I am a loser, overall, when it comes to spread betting. (This is by way of response to A Certain Person's comment on my last post on this subject. He made the mistake of mistaking the example for the thing exemplified, I was explaining the mechanics by way of example).

Broadly speaking, I have lost maybe one thousand or one thousand five hundred euros in this racket.

Why did I lose? I jumped in with the big boys when I was a small fish. I took a position on Apple (a share price at the time at probably one hundred and twenty dollars) and it went against me. That position could have either made or lost a lot of money, relatively speaking. Everything is relative, in this case to the size of one's trading capital. I lost on some other shares as well. I also made profits, but my losses outweighed my gains.

Have I learned anything from my mistakes? I hope so. First, I ceased to trade. Second, I commenced paper trading (no money involved), taking theoretical positions on shares within my price range, in which the loss, hopefully, could not be more than fifty to a hundred euros per bet, fifty preferred.

What is the result? I have been winning on paper for the last three months.

There are pitfalls in trading in the markets. A share may "gap", upwards or downwards, that is jump in price way above or below yesterday's closing price and, if it goes against you, going right past your stop loss, in which case the spread betting company closes your bet at the first available opportunity, and you have lost more than you bargained for. This does not happen very often, and, of course, it can work in your favour as well.

You will always have losing trades, and if you can't take losses (emotionally or financially) you should not trade. You must be Mr. Supercool.

There is such a thing as a "guaranteed stop loss", which means that if the price moves beyond your stop loss, you are stopped out at the stop loss price. Beginners are advised to use these, but there is some difficulty in obtaining them.

Spread betting companies make their money on the spread, that is, the difference between the buying price and the selling price, that is why it is called spread betting. When you place an up bet, it is called "buying" and, to get out of the trade (if it has not been stopped out), you "sell", and vice versa for a down bet. There are only a few points in the difference between the buying and selling price, increasing with the price of the instrument (for example, a share), and, for a guaranteed stop loss, the spread is greater. Some of the companies advertise themselves as having "tight spreads".

My brother said that in my last piece on this subject I did not mention filters. Of course, you always "filter" the market using your intelligence to find bets which meet your criteria. However, the Sharescope program, which I use has computerised filters, which may be tailor made to suit your approach.

There are over four thousand shares on the New York Stock Exchange (NYSE), and you don't want to look at them all. I have various filters in play, both for up bets and down bets, resulting in my being presented with sometimes between, say, ten and twenty graphs to look at. Of course, I don't bet on them all, I use my eyes to look at the graph, for example to see whether there is much momentum behind the movement I am looking at. If not, it is a no-no, as far a I am concerned. This, itself, is probably capable of being filtered by the program. Learning is a continuous process of refinement. Whenever you introduce a new filter, the result is a smaller number of items for you to choose from. I am still learning, it never stops.

How do you learn? Go to the best sources. There are many good books on the subject of trading, get the best.

As regards stop losses and where to place them, there are many approaches. Choose the one that suits you best, that you understand and seems to work for you. Too close, and you get stopped out on a jiggle in the price. Some people use a factor such as twenty per cent below the price. An ideal book would list every approach to every aspect of trading and the new trader would pick the ones that suit him best.

I have only ever done one day trade, as mentioned in my last piece, day trading does not suit me, you have to stay looking at your computer screen until the trade ends. It is somewhat frenetic. You choose the type of trading you do according to your personality type. My trades theoretically last up to about twenty days in duration, but have never lasted that long.

A trade is exited in one of two ways, either you are stopped out, the price hits your stop loss, in which case you may have made or lost money, because you may have moved your stop loss in the direction of the bet and gone beyond the break-even point, or you sell out. Why would you sell out? Again, this is done according to your philosophical approach. If the price goes flat for three days, I get out, or if it seems to be going nowhere, which is more or less the same thing.

The trend following system is not perfect, nothing is, and does, of course deliver some false signals. Over the last three months, on paper I have lost on more than fifty per cent of my bets but my profits have outweighed my losses by a good margin. Cut your losses and let your profits run.

People should test their systems on paper or on computer or both before they enter the market but should remember that when real money is at stake they may act differently. Women have been said to be good traders because they are process oriented, they ask themselves "What is the right thing to do now, what is the rule" whereas men, on average, are goal oriented and, if so, think of the money they might make or lose, and make a decision based on emotion, a wrong decision. And women are said to be the emotional gender. You must be process oriented, with a rule for every occasion.

Practice makes perfect, the rules become second nature. You instantly know what to do in every eventuality.

There are only four states to the market, up, down, sideways and volatile, the latter two being signals to get out fast or not to get in. You must be responsive and adaptable, adapting to suit market conditions. Go with the flow, as the hippies used to say.

Make money slowly.

As you win, you increase your trading capital. If your trading capital increases by ten per cent, you increase your bet size by ten per cent.

"The most powerful force in the universe is compound interest" - Albert Einstein.

I hope this may clear up some confusion about trend following and spread betting.

As with everything else, dedication is required in order to succeed.

David (where are those asterisks?)