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How to Learn Spread Betting and Prosper
Weeks 5-8: Do more of what's working and less of what's not
"Do more of what's working and less of what's not"

As simple as this statement reads, it's a key to successful trading and it's the main reason why I suggested you do plenty of experimentation in weeks 2-4.

It's also the reason it's advisable to keep a trading log so you can look back at a series of past trades and zero in on any losing or winning trends that might be developing. Perhaps for example you notice you're always struggling with your short term currency trades but see some promising results when holding trades for between 2-5 days.

What I advise for the next 4 weeks
An extension of what you were doing in the previous 3 weeks, so basically more experimentation but I'd define it as more defined experimentation.

What I mean by this is by now you have started to formulate some proper trading ideas and it's time to build on them. Yes, you'll no doubt go down some more dead ends (ideas that didn't work and resulted in losses) but as I've said before dead ends are useful when starting out as they can show you the way not to go.

The next 4 weeks are also going to be about varying your bet size and for this you need to be prepared to raise your maximum stake to 25p per point, but no more.

Having said that, only raise your stakes if you're comfortable with the whole trading process. If not, then spend at least another week trading at maximum 10p a point.

How much to fund your account with
If you've already deposited between £100 and £200 in your trading account I'd estimate you should have in the region of 75% - 125% of that amount. It's now a judgement call as to whether you deposit any more.

So what's the minimum amount to start spread betting properly? I think it has to be at least £500. However, only ever trade with risk capital, ie an amount of money you can afford to lose without it causing too many problems.

£10 maximum loss on any one trade
As ever build a safeguard into each trade over the coming 4 weeks and I'd suggest that should be in the £5-£10 range/ although it will be hard to lose that amount on any given trade when using small stakes.

Another advantage to limiting each trade to a maximum loss is the strategy can act like a canary in a coal mine, ie give you a pre-warning that something is very wrong.

For example, if you lose say £10 today, £20 tomorrow (2 individual trades) and another £10 the following day - STOP WHAT YOU'RE DOING AND RE-EVALUATE because something is clearly wrong.

If this ever happens to you the reason is almost certainly because you're betting too much per point. My advice is simple - cut your stake by half immediately.

Start to determine potential risk as a percentage of your account
I'll be blunt here. Unless you start to approach your trading from the potential risk angle first, rather than the potential reward, it's unlikely you'll be able to make money over time. Successful trading is therefore all about risk management.

But how do you determine the risk level? The simplest way is -

the difference between where you enter a trade and the stop loss level

This of course highlights the importance of always using a stop loss. Note, the percentage chance of the trade working is also significant when determining potential risk.

If someone trades with no stop loss in mind, or worse no idea whatsoever of when or where to take a loss, it means it's impossible to forecast the trade's risk. The trader therefore always runs the risk that one trade could totally decimate an account, perhaps wiping out 50% or more. Sadly this happens all the time when traders use leveraged products with little or no regard to risk.

The nightmarish fact about losing 50% of an account's balance is that you've got to make 100% just to get back to even. Simple maths I admit but you'd be surprised how many people realise this only after it's happened to them.

Look to risk less than 5% (of total account balance) on any trade
Countless trading studies have proved that if a trader, however talented, risks 10% or more of his overall account balance per trade he's almost certainly guaranteed to go broke, it's just a matter of time. Could be this week, next month or even in 3 or 4 years. Whatever the period it's going to happen.

Or, if the trader doesn't go broke he loses so much, perhaps 50%+ of his account's balance, that he gives up. Or more likely the excess negative pressure of losing so much forces him to throw the towel in.

So if you want to stand the best chance of success over a long period of time I'd strongly advise you to keep your risk per individual trade (as a percentage of your overall account) to 5% or under. Many traders use between 1% and 3% with the occasional 5% risk, and this is what I personally like.

Depending on how large or small your account balance is a risk of under 5% might seem like a tiny amount.

3% of a £500 account is a £15 risk but it's the only way forward for most traders unless you're willing to accept wild equity swings in your account balance. Perhaps +30% this week and then down 20% the following and so on. But with those kinds of equity swings a trader turns into a gambler.

How to determine the perfect sized trading position (in relation to risk)
It's a question that often foxes new traders - how much should they bet on any given trade? But it's easy to answer if you have the following 3 pieces of information -
  1. How much of a percentage you're willing to risk of your overall account (I recommend no more than 5%)
  2. Your entry price, and
  3. The stop loss price

Here's a couple of examples -

  • An account is £750. The trader wants to risk 3% (£22.50) on the following trade
  • Buy Barclays at £3.10 with a sell stop loss at £2.95
  • That's a 15 point difference
  • £22.50/15 points = £1.50 a point to trade
  • Assume the same trade with the same £750 account and risk (£22.50) but this time the stop loss is at a lower level of £2.89
  • £3.10 - £2.89 = 21 points
  • £22.50/21 = £1.07 a point
As you can see the risk on both of these trades remains the same, 3% of the total account balance. This was achieved by varying the bet size depending on where the stop loss level is. Stop losses therefore have a hidden value, one which many initially miss - they offer an intelligent way to answer the question -

'how much do I bet on any given trade'

Make sure you understand exactly what's going on here because as I remarked above, successful trading is all about managing your risk. Pay scant regard to risk and sadly you'll be guaranteed losses over time.

Don't worry about betting a strange amount like £1.12 or £2.37 because your broker will accept any bet as long as it's above the minimum per point. I for one am always trading in non-standard amounts rather than £1 a point or £2 etc.

Good traders regularly pass on potential trades
Many traders, especially those who fully understand that successful trading is first about risk management, will happily pass on trades even if they look promising. The reason is simple - even though the potential profits might be there, the potential losses are too great, ie the stop loss was too far away.

So never feel you have to take every trade and always look at the markets from the risk angle first, then profit.

Use leverage to your advantage - You don't need to be scoring big on every trade
The good news about leverage is it's possible to risk 1% or 2% and make a profit of 5% - 10%+. Bag a few 5%+ profitable trades now and then and you're well on your way to a stunning return for the year.

The point I'm making is that you don't need to be trying to make making 5%, 10% or even more on every trade. Just 1 or 2 now and then can work wonders for an account's balance.

Successful trading is not about today's trade, or even this week's trades, it's about generating good profits over many months and then compounding those returns over the years. So keep your risk under 5% per trade and focus on the bigger picture rather than any one individual trade.

Important: Don't confuse losing with making a mistake
As I indicated throughout this whole guide, losses, as long as they're kept small, are often good news when you start out because they normally teach you far more than winners. But don't confuse a normal loss with a mistake.

Many losses, a so-called 'normal loss', will be because you got the market wrong.

For example your analysis suggested that Gold had a good chance of rising this week so you went long. But the price fell. That is not a mistake, it is a trading decision you got wrong. This point is important to understand.

A mistake is where you lose money but not because you got the market direction wrong. Instead it's related to something that could easily have been avoided. The loss in effect was entirely down to you and had little to do with how the market moved.

Here's a good example -

  • You understand the significance of the important economic figures (usually the American ones have far more market relevance than the UK ones)

  • When they're released the markets can go into what I call Casino mode - prices jump all over the place with little rhyme or reason

  • So you develop a trading rule - don't trade around these figures, instead watch and wait for the markets to calm down before deciding whether to get involved or not

  • But you fail to respect the rule and enter a trade at 1.20pm (figures are normally released at 1.30pm UK time)

  • The figures get released, stocks initially get hit hard before rebounding higher

  • Your long position gets stopped out when the market moves lower for a 4% loss
That is a classic example of a trading mistake, one that could have easily been avoided if you had respected your trading rule(s).
The best traders often lose less
Here's an interesting point to consider. At first glance many people think the better traders, the ones who make all the money, do so by enjoying more winning trades and/or trading at better prices. So when you or I buy a share at £4.50 and sell it at £5.00 these better traders buy it at £4.25 and sell it at £5.25.

But in my experience this is often not true. Look at the following example -

  • Trader A and Trader B meet at the end of the year to discuss their trading
  • Trader A reports that he made £100k for the year while Trader B reports a profit of £50k
  • Both want to improve their trading records and so visit a 'trading coach'
  • The coach tells them to make two separate piles of the past year's trading statements and put all their winning trades (whether £1 or £1,000) in one pile, and all their losing trades in the other
Here's what the trading coach sees -
Trader A
Trader B
Winning trades
£150k
£150k
Losing trades
£50k
£100k
Net Result
£100k profit
£50k profit
The coach tells Trader A that he is very effective at making money and very 'effective' at not losing too much.

But the coach has an important observation for Trader B - he shows him that he's just as effective at making money on his winning trades as Trader A but overall his trading falls down on the amount he loses. So if he can reduce his losses by just 25% his overall profit could rocket by 50%.

This highlights the point that making more money is not all about picking more winners. Yes, of course this will help but I think it's far easier to pick less losing trades than it is to pick more profitable ones. This is something you should try to concentrate on.


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