Spread betting skills - how to think like a trader

When spread betting, one of your toughest opponents is not other spread betters, it's your own brain. Here are three ways it can trick you into losing money.

Spread betting is a zero sum game. That is, every pound you win is a pound someone else loses, and vice versa. So you might think your main competition is other spread betters. And you'd be half right. But beware one of your toughest opponents is your own brain. Here are three ways it can trick you.

Don't mistake luck for skill

The classic error many first time spread betters make is mistaking luck for skill. You place a couple of bets, you make a bit of money and so you assume you are a gambling maestro. So you double the size of your next bet, ditch your stop losses and bingo the next trade turns nasty and costs you a fortune.

So be realistic enjoy your wins but be honest about whether you got lucky. In other words, don't just analyse loss-making trades and learn from them (although you should do this too). It's equally important to analyse your wins and ask yourself how easily you could repeat them.

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Don't trade too much

"Don't just do something stand there," Ronald Reagan once quipped. It's good advice. If you have a trading system and everyone should have one stick to it. For example if your favourite chart pattern isn't forming the way you expect, don't take a punt. Wait.

Equally if economic data that might drive your favourite exchange rate pair is thin on the ground wait. Do nothing. A better opportunity will pop up eventually. Don't confuse action with results. Only trade when you have a reason to. It's much better to make a few big gains rather than lots of little losses.

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Don't be discouraged by losing money

This is the flipside of the second point. Spread betting is just that betting. That means you will lose money often. That's because markets are unpredictable and quite often irrational. But losing money isn't a problem provided you win more often, and in larger quantities, than you lose!

So if you have worked out that you tend to win 40% of the time and lose 60% of the time, you need to weight up your winning bets so that you come out with an overall profit. But working out that kind of pattern takes time and money. Using a free simulator on your broker's website ('paper trading') is a good start but ultimately there's no substitute for having skin in the game.

So in the early days don't be put off and do take some risks. But keep your bets small and use stop losses. You can never be sure you will bet the right way. But over time you will get better at spotting winning opportunities whether your preferred market is commodities, shares or currencies. See your losses as an investment in training yourself, rather than a reason to jack it all in and head for the pub.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.