7 Golden Rules on Spread Betting
One of the most accessible types of trading for new investors as compared with CFDs is spread betting. All you have to do is bet on what direction a financial market will take over a period of time. It may seem less cost effective than CFDs but the potential to earn maximum profits is high as long as you follow a few simple rules prior to placing spread bets.
1. Formulate a simple trading plan
It is important to stick to a simple trading plan and learn about the markets you wish to trade. Some of the factors to consider is the length of time you want to be in a position and the amount you are willing to risk. It is always prudent to bet on markets you are familiar and comfortable with. Gain enough knowledge about what the markets consist of, what influences them most, and their trading hours. Are you comfortable with short-term trading? This involves placing several trades in a single day. Over a medium term you may end up placing fewer trades spread over a week or month. Some traders prefer longer timeframe which can extend to a month or a year. Most importantly, determine the amount you are willing to risk. It is always prudent to start with small spread bets and as you develop you can increase your stake size that ought to come from any profits rather than dip into your savings.
2. Research before you bet
Always place a trade backed by substantial research rather than on hearsay or simply any gut feeling. Study the fundamentals of a market and try and figure out its technical characteristics through charts and other tools available. Research allows you to analyze and learn from trades that went wrong so don’t hesitate to spend time studying the markets.
3. Gear up for losses
Undoubtedly, as much as you would love to continue a winning streak, losses are always a part of the game. This is the time to stay in control of your emotions. Every time you place a spread bet spend a few moments imagining that you hit your stop loss and you are on a losing streak. This will help you get comfortable with any loss as you learn to control your emotions. Those winning bets will also seem even better. The key is to stay healthy and be able to bear losses both financially and mentally.
4. Remember the 80/20 rule
As much as 80 percent of investors lose money using leverage. However, many investors end up with more winning trades than losses because overall investors will run their losses. Losses incurred on a losing trade a bigger than profits on winning trades.
5. Place simultaneous orders
You can define the boundaries within which you make a profit or loss by placing a simultaneous stop loss and limit order. Make sure your broker quotes firm prices on a screen and place your bet when you feel the underlying instrument will move sharply in an upward or downward direction.
6. Avoid a spread bet just because you’re bored
Never make the mistake of placing a spread bet just for the sake of betting. You could often end up with significant losses. It is always prudent to place bets wisely when you are confident. Self belief is key to your success. Have confidence not only in the market but your stake size, which should never be an amount beyond your means.
7. Know the risks involved and remain disciplined
Undoubtedly spread betting comes with risks especially in volatile markets. Always be prepared for the worst case scenario and the maximum you can afford to lose if you place a bet. If you enter a new market it is time to tread cautiously. Remember, any tax advantage may not be applicable if you derive your income only from spread betting.
Of course, there is much more to spread betting. The key is to become adept at money management and learn to make sensible spread bets. When you are tempted to close a profitable trade early and continue with one that isn’t going your way, it may be prudent to do the opposite and cut your losses wherever possible.