Three mistakes new spread betters should avoid

"Many traders have come to realise that even the best trading strategy with the wrong mindset can deliver poor results," says Sandy Jadeja of spread betting provider City Index. So, how can you develop the right mindset? Here are three hints.

Don't anchor. In the absence of any other clear buy or sell signal, it's easy to get lulled into creating them out of thin air. So, a trader might say "I'll close out when the share hits £3" or "I will buy the index when it hits 5,000 points". These round number targets might make you feel as though you have a trading system when actually you are plucking decisions out of thin air. Equally, don't get hung up on the price you open a bet at if it will stop you applying your own stop loss rules. "If I just wait a little longer, I will be back to break-even" isn't a strategy it's just wishful thinking and may even lead you into bigger losses. In short, pick a stop loss price and stick to it.

Next, don't become a slave to opinion. As psyfitec.com notes, we all have a tendency to put too much faith in the opinions of those in a position of influence. So, we tend to rely heavily on company reports, analyst opinions and investment gurus without recognising that they may be "as mentally hamstrung as we are". As a spread better, you need to develop a healthy skepticism and decide for yourself. As the old investing adage says, no-one rings a bell at the top of the market".

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

Equally, it can be tempting to heed the siren calls of the many brokers in the industry that make money when you trade, when, actually, the best option is to do nothing.

Thirdly, don't get carried away. Spread betting is competitive and many retail investors lose money doing it. So decide which index, commodity or currency pair you are going to focus on and do your homework. Too much of a scattergun approach may be more fun but won't make you any money. Then decide how much you are prepared to lose on a bet and pick your bet size and stop loss points accordingly. Never throw caution to the wind hunting the "trade of the decade" or any similar sounding short cut to riches. Chances are what was a winning trade yesterday won't work today!