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.
1. Don't mistake luck for skill
The classic error many novice 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.
2. 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.
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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.
3. 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 weigh 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.
In the early days don't be put off and 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.
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