Novice Spread Bettors and Common Mistakes
Financial spread betting has exploded in popularity since its creation in the 1970s, giving rise to new traders in their thousands and, along with them, a new generation of novice traders like never before. Whereas spread betting was once the reserve of sophisticated investors, it has now become more accessible that ever before, thanks to the advent of the Internet and mass-market by online brokers. The difficulty with novices trading spread betting is that while the rewards are widely discussed, the real extent of the risks and potential losses on the table might not be immediately obvious. Furthermore, with the tendency to make common, costly mistakes, novice traders can quickly find themselves in difficulty if they don't take the time and effort to trade effectively.
While there is no real substitute for experience, there are a number of key mistakes novice traders should watch out for in order to protect their capital and avoid running aground with their portfolio.
Novice Mistake 1: Cutting Profits and Giving Losses A Chance
The first important mistake to avoid is more behavioural, and on many levels it is an instinctive response for traders who haven't been initiated into more profitable ways. Novice traders can fall into the trap of banking profits as soon as they emerge, in the mistake belief that this is to the benefit of their account. This means that positions with the potential to grow and develop are choked off too early.
Conversely, traders feel the same urge in reverse towards their losses. The mentality seems to commonly reflect a desire to give losses a chance to recover, while snapping shut the window of opportunity in times of profit. In actual fact, the best policy is to reverse these concepts, such that losses are exterminated as quickly as possible and profits are allowed to grow and develop to their fullest extent.
Novice Mistake 2: Getting Emotional About The Spread Bet
Another common error into which traders can easily slip is getting emotional about trading outcomes, and making decisions on the basis of hunches, inclinations and gut feelings rather than strategy. While there is no doubt room for trading off softer cues with experience, traders who don't ensure they trade logically, consistently and objectively can find themselves running into cost difficulties fairly quickly. Remember that while you might not feel like you're gambling, making decisions on any basis other than raw, calm trading logic is likely to be a high-risk technique.
Novice Mistake 3: Overleveraging
One of the main attractions on the table for financial spread traders is the degrees of leverage on offer, which can be more or less weighty depending on the original stake amount. In spread betting, each point in movement is a multiple of the original stake, either positive or negative, with unlimited earnings and liability on the table. This makes it easy for traders to get a bit too bold, and to open positions that in reality they are unable to afford - either individually, or on aggregate across the account. This is known as overleveraging, and in these circumstances it only takes one or two key positions to fall for the empire to come tumbling down.
While these are far from the only mistakes that novices can make, and indeed far from being exclusively made by novices, they provide a solid starting point for those looking to build a robust, resilient spread betting portfolio.