LONDON, January 13, 2012 /PRNewswire/ --
Every spread bettor knows about cutting their losses and letting their profits run. Yet, most spread bettors still give in to poor trading psychology. City Index explains how to break your bad spread betting habits with a considered strategy and risk management tools to help you to achieve more profitable trades.
Typical trade errors associated with poor trading psychology can be avoided by planning your spread bets with proper targets while being aware of impulse trading habits. However, because spread betting is a leveraged product, placing spreads bets can be a real rollercoaster ride for even the most cool-headed spread bettor.
While you only need to deposit a small amount (typically between 1% and 10% of the total value of your trade) to open a spread betting position, movements in the market can not only generate gains, but can also incur losses greater than your initial deposit. And this is how bad habits can hurt good trades.
1) Taking Profits Early
Some bad habits can include when traders jump on the first sign of a profit, especially if they have weathered a series of losses.
The immediate promise of profit has seen countless traders immediately abandoning whatever expectations they may have had about the market as they cash out quick. Exiting early can either be out of fear that the market will move against them, or because they are in the mindset of wanting to make a fast buck.
2) Letting Losses Run
Instead of cutting their losses short, bad habits can convince many traders to take a gamble instead, believing that the loss accumulated so far will decrease and that the market will move in their favour, eventually providing them with a winner.
For example, if 8 out of 10 spread bets are profitable, the 2 which accrue losses can quickly outweigh profits earned by your other positions if allowed to run.
However, some traders will continue running losses with mounting odds against them. Of course, a losing trade may even get worse rather than better. This is because we are naturally reluctant to accept a loss, even when we know the amount up front.
Determined to turn defeat into success, eventually the loss will grow to a size that forces the spread bettor to close the trade due to a lack of funds to sustain their position, or due to the fact that the trader has thought 'enough is enough'.
3) Putting All Your Eggs In One Basket
It may be tempting to stake everything on a single spread bet that you feel is a sure fire winner, but placing all your eggs in one basket and not diversifying your trades will mean that a particular event could have an enormous impact on your position, especially if the market gaps.
When diversifying your trades it also helps to learn the factors which impact on each market. This is because many markets are interrelated and this correlation can make it harder to achieve true diversification. For example, a rise in energy costs is often associated with a fall in the share prices of the airlines.
If prices are related, then your positions are not truly diversified, even if some of these relationships are inverted, which causes one position to rise in relation to the fall of another.
Breaking Bad Spread Betting Habits
These bad habits can be broken by using risk management tools as part of a carefully considered strategy while resisting impulsive decisions from poor trading psychology.
A good spread bettor must learn to watch their positions carefully and close their positions once prices cross a pre-determined level, because letting your losses grow can quickly outweigh profits gained from your other positions.
Risk management tools including stop losses and limit orders can ensure that your spread bets automatically close out or cash out at predetermined levels. Orders can also be used to enter a market when prices reach a desired level for speculation.
Meanwhile diversification of your spread bets can protect your account from any particular event, whether energy prices are soaring or the bank shares are crashing, this should have a reduced overall effect.
Diversifying your spread bets could also help to minimise fluctuations across your account. While one spread betting position is doing well, another may be failing, but overall profits could average out to produce a steady growth in profits. This also provides an insurance against incurring losses and while it may cost more money to diversify, this could make your account more secure as a whole.
What makes it difficult to avoid bad habits is knowing we all want to be right all of the time.
So use risk management tools to help plan your spread bets and do not to let psychology get in the way your accounts success. In the long term, if we cut our losses short and let our profits run, we could be able to enjoy more profitable trades.
To learn more about spread betting and CFD trading from City Index, visit: http://www.cityindex.co.uk/spread-betting/
About City Index:
Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.
As a group, we transact in excess of 1.5 million trades every month in over 50 countries. We provide access to a wide range of instruments including margined foreign exchange, CFDs and, in the UK, financial spread betting.
We constantly look to improve the performance of our platforms and expand our range of services. The result is our customers benefit from innovative trading tools with transparent pricing, competitive spreads, and a high standard of customer support. Visit http://www.cityindex.co.uk/ for details.
SOURCE City Index