LONDON, February 7, 2012 /PRNewswire/ --
Thanks to its low margin, spread betting is one of the most accessible forms of trading the financial markets, providing an easy entry level for new traders. However, even the best traders sometimes get it wrong. Here City Index outlines the 5 most common spread betting mistakes and how to avoid them.
Currently in the UK, Spread betting is a tax-efficient way of trading the price movements of thousands of financial markets globally. Tax laws however remain subject to change. You can also go long or short on market prices, making it possible to profit even when prices are falling. And because spread betting is a leverage product, you only need to deposit a small percentage of the total value that you wish to trade.
This allows spread bettors to magnify their gains, but can also magnify losses which can exceed your initial deposit. This is why it is important for traders to fully understand the risks as well as the rewards when placing trades.
1) Not Understanding Leverage
Understanding leverage and the true value of your trades means that you can manage your potential spread betting downsides more effectively.
Spread bets are an exciting alternative to traditional trading because you only need to deposit a relatively small amount in order to gain a large exposure and this means that your return on investment is magnified, both for gains but also for any losses that you may experience.
As well as understanding leverage, having a spread betting plan and strategy that outlines profit targets and acceptable losses against anticipated market fluctuations could also help to minimise losses and lock in profits.
2) Not Having a Spread Betting Strategy
While spread betting can be exciting, it can also be emotional, especially if you have made the mistake of not creating a carefully considered profit and loss strategy in place for each position.
This can help you to avoid the common mistake of taking profits early and continuing to let your losses run in the hope of a recovery in the market. Most experienced traders attempt to cut their losses early and let profits run before cashing them out at a sensible but also targeted level.
Stop losses and limit orders can be used to do this. This spread betting strategy not only helps to eliminate the possibility of impulse trades, but also lets your account effectively run itself, negating the need for you to constantly check on the progress of your account.
3) Not Knowing the Market
Understanding the nature of your chosen markets, what affects its prices and its level of volatility can have a huge impact on your spread betting position. Understanding these factors will allow you to react quickly and correctly when relevant news emerges.
For example, if a spread bettor does not know that a spike in crude oil prices would raise airline costs and therefore could pressurise airline shares, they could be fighting a losing battle spread betting on EasyJet shares.
The added benefit of having an almost intimate understanding of your market's behaviour could help you to decide where to place your stop losses and limit order in anticipation of a potential market fluctuation.
4) Not Following the News
In addition to understanding your chosen markets, keeping up with the news will allow you to capitalise on the latest information by opening your spread betting position before anticipated market movements occur.
While charting and technical analysis can be highly effective in predicting future market movements based on patterns, key events and rumours in the news can override even the most frequent trends.
5) Not Using Charting and Other Tools
Charting patterns and other technical analysis tools can provide valuable insights into the markets, demonstrating year on year patterns and potential future price movements for you to profit from, whether you choose to go long and buy or go short and sell with your spread betting.
Even seasoned spread bettors can keep their trading skills sharp by looking for new ways to maximise their spread betting potential. This is why spread betting seminars are a popular way to learn more and expand your knowledge of how to analyse the financial markets whatever your level of spread betting experience.
There are many more secrets to successful spread betting which can only be gained with time and experience. Ensure that you fully understand the risks, form a plan which considers stop losses and limit orders, and continue to follow the news while using technical analysis to understand the nature of your chosen markets better.
To learn more about spread betting as an alternative form of trading visit: http://www.cityindex.co.uk/spread-betting/what-is-spread-betting.aspx
Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.
About City Index:
Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through City Index.
As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, financial spread betting.
SOURCE City Index