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How to Learn Spread Betting and Prosper
Weeks 2-4: It's all about experimentation and mistakes
After the first week, where you should have done at least 50 if not 100 different trades, you should be very comfortable with -
  • How online software really works
  • Exactly how to buy, sell and go short
  • How the bid-offer moves in different markets and at different times of the day
  • When and how to use the different order types
  • How stops work in real-time trading, and what slippage is and how to estimate it

The next 3 weeks are going to be about both experimentation and making plenty of mistakes. Note, do not increase your bet size for the next 3 weeks, keep it at 10p and no more.

Why mistakes are good (at this stage of your trading career)
Everyone knows it even if we don't always admit it - we tend to learn more from our mistakes than from our successes. So when you make mistakes over the next few weeks, as you will, it's important to learn from them.

The beauty about making mistakes at this stage of your spread betting career and learning from them is you'll be losing small amounts of money because in turn your bet size will be small.

I'm hoping that you can now see the advantage of using Finspreads as they're the only spread bet broker who let their clients trade at 10p when first starting out.

So start to think of losses made from mistakes as the price to pay for a good education.

How to approach the next 3 weeks
There are 3 main goals for the next 3 weeks and all relate to market experimentation, so -
  1. Experiment with different markets
  2. Experiment with different trading ideas/strategies, and
  3. Experiment with different trading timeframes

Keep trading at a maximum of 10p a point

As with week 1, the trick to making the next 3 weeks work successfully is to continue trading at 10p a point.

Many however will be eager to get going and start betting multiple pounds per point, after all a profit of say 57p or £1.75 doesn't make speculation seem worthwhile. But profits are not important right now, whereas controlling losses are, and the only way to properly control losses when starting out is to trade with very limited risk.

As I mentioned at the beginning of this guide - so many new spread betting clients lose significant portions of their account during the first few months of trading that their careers are effectively over before they start.

Getting the markets wrong wasn't necessarily their mistake, rather it was getting them wrong while betting far too much per point.

1. Experiment with different markets
During the first week I advised you to trade 6 UK shares. Now, look to broaden your horizon and pick up to 12 different markets. The ones I advise are the more popular markets, such as -
  • FTSE 100
  • Wall Street
  • Gold
  • Crude Oil
  • Barclays

Note: The above offer a good balance between the different sectors - stockmarkets, currencies and commodities.

An interesting point to note, especially to those new to spread betting, is how can someone trade Crude Oil when perhaps they know little if anything about the commodity.

It's a good point I admit.

But many traders, especially when dealing in leveraged products, focus solely on the price as they feel it will normally reflect all known and relevant information at that time.

The advantage about concentrating on just the price is that an experienced trader can get involved in a wide range of markets with ease and without having to study a myriad of fundamental information and research.

Pay attention to the following

When you're trading look out for points such as these -

  • How do the prices move during the official market opening and closing? For example, even though the FTSE 100 will be quoted 24 hours the cash market opening at 8.00am and closing at 4.30pm should be observed

  • Do prices move differently in the morning to the afternoon when the US markets are open?

  • If you're looking at some stocks how does their share price move in relation to the underlying FTSE 100 index? Are they leading or lagging the index and does this offer any trading clues?

  • How are stop loss orders executed and is there any slippage? If so, can you estimate what it might be before the event?

  • If the markets you're following are quoted 24 hours does the market act any differently at say 3pm versus 10pm
2. Experiment with different trading ideas and strategies
Weeks 2, 3 and 4 are also the time to start looking at and experimenting with different trading ideas.

Some of them might show merit and others perhaps will be a disaster, but this is all valuable information for the future. For example, ideas that don't work and show little promise are of value because they show you not what to do and often successful trading is more about cutting unnecessary losses rather than generating bigger profits.

And by trading 10p a point even if a trade goes spectacularly wrong the loss should be no more than £5. In fact I'd strongly advise for the next 3 weeks that you make it a rule not to lose more than £5 on any one trade, preferably though far less.

Keep a trading log

Try to keep a note of all your trades but they don't have to be detailed, for example -

  • The reasons you entered the trade
  • What price the trade was executed at
  • The stop loss level
  • What sort of profit potential you were looking for
  • How long you expected to stay in the trade (1 hour, 4 hours, 1-2 days etc)
  • Any other relevant information

Keeping notes is important because you want to try to see where your profits and losses are coming from. Are your day trades for example losing steady money whereas slightly long term trades, lasting between 1 and 3 days, show some merit?

3. Experiment with different timeframes
Some traders specialise in holding a trade for less than an hour, others hold them days or weeks, even months. There is of course no right or wrong answer as to what time frame to trade in so why not trade experiment, for example -
  • Some ultra short term trades, lasting a few hours
  • Trades lasting 4-8 hours
  • Trades held for 1-2 days
  • Trades held for up to a week etc

What you might find is that you tend to favour a timeframe that reflects your personality. For example, someone reading this might be a go-getter, always on the move, always something happening in their life. If so they'd naturally lean towards short term trading the markets, ie where are prices moving over the next few hours, day or a maximum few days.

Another reader might be laid back, more of a thinker and plotter. If so, it's odds-on they'd be no good at short term trading. Instead, medium or longer term moves would probably be their preferred strategy and overall market outlook.

This is why experimentation is so worthwhile at this stage as it helps to define the timeframe best suited to you.

Take note of costs - especially for short term trades

Most people think there's only one way to lose money in the markets - you get the direction wrong. Whereas that's obviously the dominant reason there's actually another way, and one which many discount - the role that costs play.

Every time you trade there's a cost usually made up of commissions + the bid-offer spread. Commissions are not charged with spread betting but there is a bid-offer spread and that can become a major trading expense depending on how active you are and how short your timeframe is.

Costs are the number one reason why it's so hard for the majority to make a profit via day trading. Remember, the cost of trading is added to each loss and subtracted from each profit.

For example, take the assumption that a trader makes an average profit (before costs) of £100 and an average loss (before costs) of also £100 and assume costs run at £10 per trade -

  • Gross profit will be £90
  • Gross loss will be £110

And it's that £20 difference that's often so hard to overcome especially for ultra short term traders.

Having said that I strongly encourage you to short term trade the markets during the next 3 weeks so you can find out for yourself how tough it is in real-time trading (risking a maximum of 10p a point).

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