Let Profits Run and Cut Your Losses

Human psychology throws up interesting reactions to the spread betting trading climate. We instinctively feel a sense of reward in victory and a sense of depression in defeat. We trend towards safety in protecting our assets, but we throw caution to the wind in recouping our losses. Unfortunately, for most traders, their instincts and innate reactions work contrary to the objectives in trading, and can have a marked impact on both the degree of profit or loss you sustain on a given transaction while also often being the difference between trading success and failure.

Because we like to think we're correct, and we're given that validation when spread bets slip into the black, traders often feel compelled to sell when the profit arises. It's seen as a safe, banked profit, and another successful transaction to notch up on the scoreboard. For that reason, traders frequently cut out of their profitable positions, and start to chalk up earnings, which are then quickly corroded by a few runaway negative positions.

At the same time, a well-researched position that turns unexpectedly into loss can be a bitter pill to swallow. We often defer taking the psychological hit on things not working out by assuming a position will recover, if only it's left for another hour. Or two.

These are both equally destructive behaviours, and must be stamped out from your trading style if you want to be successful. The natural tendency of traders to cut out their profits and extend their losses is precisely the reverse of sensible trading strategy. If a position isn't working out, waiting to sell at a lower price point in an hour's time doesn't logically make sense. While the position might recover, you're far better to end your exposure to that market and to move on to more profitable positions.

Simultaneously, open positions that are profitable should be allowed to run and run until there is clear evidence of a reversal in the market. Don't settle for taking a few safe points - these transactions will probably happen less frequently than losing transactions, so it's important that you make them count. For riskier positions, consider even part closing your trade, covering part of the trade - anywhere up to 25%. This allows you to leave a position to run its full course, while also being guaranteed a satisfactory return - effectively win/win.

Chasing Losses

These two standalone behaviours account for a massive proportion of losses sustained by inexperienced traders. By ramping up deposits to recover losing positions and quickly slashing those that might untouched run for hundreds of points, traders are applying needless pressure to their trading accounts from both the positive and the negative side. Squeezing margins and maximising your expenses can never be a good way to do business.

This is not incremental or insubstantial either - you can make money on 1 in 5 trades being successful with a sensible approach to allowing profits to run, whereas you'd have to be a much more prolific trader to cover your losses with more frequent, smaller profits.

Part Closing

In fighting to resist cutting profits too early, traders can often feel aggrieved when previously winning positions start to turn and quickly shed a few points. It often undermines their confidence in allowing profits to continue, and reinforces the natural tendency to bank profits as quickly as they arise. But there is an alternative - part closing. Part closing your position allows you to effectively lock in a percentage of your earnings, while still hanging on to the position as it (hopefully) continues upwards, giving you the best of both worlds. Provided you do your calculations accurately, you can create a no-loss scenario, whereby you've delivered an acceptable return on your investment while still clinging on as the position continues to soar.

What Is Part Closing?

Part closing runs on a fairly self-explanatory logic - by settling a proportion of your bet at a winning value, you thereby minimise your risk while guaranteeing a profit. In the worst-case scenario, your profitable closing position will be your maximum return. In best case, you could end up with a runaway position that works wonders for your trading balance. Simply by moving the goalposts to capture a proportion of the profit as you go, you can cut down your risk profile dramatically, in order to cover your exposure for the remainder of your position while paving the way for unlimited profits.

Part closing is particularly easy - simply by selling (or buying, whichever is the reverse of your original transaction) to the extent that you wish to part close, you can realise any gains that have been made on that portion of the position. Depending on your overall strategy, you might want to close just 10% of your position when profits surpass a certain level, or you might think about covering more heavily at 50% or beyond.

The individual decision as to how effectively to part close is up to you, but it is advised that you do so in a way that leaves you sufficiently exposed to really capitalise on further gains in your position. Leaving 5% in might be too little if you're looking to leverage the possible gains, whereas you might be better off leaving 60% of a transaction running if you can cover your exposure and make a profit with the banked 40%. This all depends on your appetite for risk, and the circumstances at play in any given trading scenario, but in principle this process of swallowing up partial gains can have the desired effect.