Spread betting: Four common mistakes

Novice spread betters can expect to make a few slip ups. Here are a few tips to help you avoid some of the most common ones.

Accept when you get it wrong

Being a 'glass half-full' sort of person can make life a lot more fun. But when it comes to spread betting it's not always the best strategy. No matter how much homework you do, sometimes you will get a trade wrong. Even the so-called experts slip up.

So the first tip is, while you may brag down the pub, at least be honest with yourself. Keep a record of what you were thinking before each trade a betting diary if you like. Then review what actually happened and compare it to your expectations. That way you can start to reduce the number of duff trades where you made the wrong assumption or perhaps missed a key piece of data. And make sure you are as honest with yourself about wins as losses we all get lucky, but recognising winners' luck is important.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Keep losses to a minimum

This may seem like overly obvious advice, but don't lose more money than you have to! Speak to your broker about stop-losses you pay a little bit extra for the peace of mind of knowing you can only lose a certain amount if, say, the FTSE 100 rises rather than falls as you hoped. And if a market is very volatile, consider paying for a guaranteed-stop. These get you out at a specified price, index level or exchange rate, although plain-vanilla stops sometimes won't if a market is moving very fast and everybody is trying to close out at once.

Another way to limit your downside is with a covered warrant. Although you can lose 100% of your initial investment (the entire premium) with these, with an open-ended spread bet or CFD, you can lose even more. Or, if you prefer to spread bet, try your hand at fixed-odds bets see below. Again, your downside is capped from the off.

Don't follow the crowd

As humans we have a built-in love of stories (we use myths and legends to help us make sense of the world) and a desire to fit in with the crowd. There's wasn't much wrong with either trait when it came to surviving as hunter-gatherers. However, fast forward to modern times, and our Stone Age fondness for stories means we're also suckers for stocks that attract lots of positive press. We like to hear about a successful CEO, sales growth, and industry awards. Good corporate PR is seductive. The trouble is, even if they're true, big stories are usually 'fully priced'. Since everyone knows about them, the only way for the share price is down.

The solution is to have the courage to hunt down the less popular bets. For example, whilst almost every football fan will bet on this year's World Cup in South Africa, fewer will bet on the Europa League. Most people will have a view on David Cameron's chances of winning the election, but many fewer will bet on whether UKIP will win a seat. Sure, the less liquid bets can attract wider spreads, but equally your odds of banking a decent win are that much better. Knowledge is power. Get to know your market and as many of its quirks as possible and you are more likely to unearth the best betting nuggets.

Don't bet for the sake of it

If you're a goalkeeper, and you're faced with saving a penalty kick, studies show that your best bet is to just stand in the middle of the goal you'll make the save 60% of the time. Yet most only do this 6% of the time. By diving left or right often to little or no effect they feel better because at least they're making an effort. Equally, some spread betters lose money because they feel compelled to "'do something'. Don't. Wait for the right opportunity. And if you have an addictive personality, think carefully before taking up spread betting. The array of bets available these days is just as beguiling as anything you'll find in the casino and just as hazardous to your wealth.

Fixed-odds betting how it works

If you're concerned about the theoretically unlimited losses you can rack up in spread betting, you may be better trying your hand at something a bit less risky first fixed-odds betting.

This is the financial equivalent of a bet on the races. You make a bet on an event happening or not happening, staking a certain amount up front. If the bet doesn't come off, this is the maximum you can lose. If it does, you win a fixed amount. Just like gambling on an outsider in the Grand National, the riskiest bets will have the lowest upfront cost and the biggest potential gains and obviously the smallest chance of actually paying out.

The most popular type of fixed-odd bet is a simple up or down (or bull or bear) bet. You might bet that the FTSE 100 will be higher than 6,000 in two months time. The betting firm will ask you to choose how big you want the potential payout to be, and will then tell you how much you'd need to bet. In this case, with the FTSE at 5,700, you'd have to stake £25 to have a chance of winning £100 giving potential winnings of £75 or a return of 300% on your bet.

Other bets include the 'barrier range' (betting the market will trade within a given range between now and a specific date) and one touch (betting it hits a certain level before a specific date).

For more, see Betonmarkets.com and Finspreads.com.