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How to Learn Spread Betting and Prosper

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Week 8 and beyond: Grow with the market
I read a business book once that said only attempt to grow your business in a growing market as it's far less risky than trying to grow it in a stagnant or declining one. In fact, if you know what you're doing and are a competent businessman this strategy is almost risk free.

The same applies to your trading where a 'growing market' is defined as your account balance rising.

Keep your trading size small for another 1-3 months
If you've opened an account with Finspreads the minimum stake per point gets raised to 50p per point two months after the opening of your account.

However, regardless of how well your trading is going, I wouldn't advise you start to trade more than 50p a point for the next 2-3 months. Even at 50p a point a lot of money can be made and of course lost, and losses are always what you must try to control.

The size of the market is relevant to the size of your stake
At the time of writing Vodafone is trading around 140p. A 10% move is therefore equivalent to 14p and at £1 a point that's obviously £14. This is what I define as a 'small market'.

But look at a market like the FTSE which is currently around 5700. A 10% move is worth 570 points or £570 at £1 a point. Clearly FTSE is much larger market than a stock priced under £5.

Why is this relevant information?

Because depending on how large or small your account balance is it could mean you have to choose 'smaller' markets to trade so your risk can be better controlled. For example -

  • Assume your account is £500
  • I've already stated that it's unwise to risk more than 5% on any given trade (and preferably no more than 3%)
  • 5% of £500 is £25
  • Your analysis might indicate you buy the FTSE with a 70 point stop
  • 70 x 50p = £35 risk
  • So taking this trade in such a situation would mean far too much risk and I'd advise against it

The best way to approach this problem is to perhaps look to trade a FTSE 100 share instead of the index. If the index rises or falls by x% the share will likely mimic the move give or take a touch.

Note, this problem is even worse if you look to trade the Dow Jones, for example -

  • At the time of writing Finspreads is quoting 10947-10948
  • If your account balance is £500 a 5% risk is £25
  • At 50p a point that equates to just 50 points of the Index which equates to a move of less than 0.5%
  • So if you want to trade the Dow Jones index and keep your risk in check you need a large account balance of at least several thousand pounds

As with the FTSE example above there's a solution. Either pick a share to trade that is likely to mimic the index or better yet trade the S&P 500 index which is currently quoted around 1180.

If you need to practice more trade smaller markets
Some readers either won't be comfortable in increasing their stakes (and associated risk) or don't want to. In that case just stick with smaller markets where 'small' is defined as any market that has a low point value.
  • The S&P 500 at 1180 is small - Wall Street at 10950 is large
  • Vodafone at 140 is small - Apple at 23700 is large
Let your results determine when to increase your size
The question of when, or if, to increase your trading size is actually easy to answer - only do so if you're making money.

Yes, many of us are often impatient and will be eager to trade at higher than the minimum of 50p a point but I'd advise you keep your feet on the ground and realise you're still learning a complex game, one in which the other players, ie your opponents, take no prisoners.

I don't want to sound like a scratched record but the markets will always be there for you. So what if you miss some good action this week or your trading is going well but at 50p a point the profits are relatively small. Being a successful trader is not about this week's, this month's or even this year's results - it's about compounding solid gains over many years.

Create a snowball effect - but also in reverse
A snowball obviously gets larger as it moves downhill and this is how you want your account to operate. As you make money increase your size, which is easily to do if you trade with a risk per trade of between 1% and 5%.
  • A 3% risk on a £1,000 account is £30 and if the account balance increases to £1,250 that would make it £37.50
  • But if the account takes a hit, perhaps from £1,000 to £850, your trading size will automatically be reduced so a 3% risk would become £25.50

This highlights the beauty of working out your risk per trade before the trade is initiated as you'll always know how much to trade per point, literally down to the nearest 1p.

What's interesting about always risking a similar amount per trade (say 3%) of whatever an account balance is it's hard to go broke although that doesn't mean an account can't be decimated.

This is because as the account balance goes down so does the amount to risk per trade in monetary terms although the risk always stays the same as a percentage, in this case 3%.

So if the account's balance started at £10,000 (3% risk = £300) but it now stands at £1,250 a 3% risk would equate to £37.50 and the trader would still be in business.

Good traders often struggle when they start out
Don't be too disillusioned if you initially struggle to make money over the coming months. I've said before in this guide that profitable trading isn't easy especially when leverage is involved - if it was then half the western world would be part time trading from their villas in the sun.

The probabilities of you initially struggling are therefore high but if you follow the steps in this guide you've got a mechanism to be able to take on those probabilities - betting small hence keeping your losses small.

If your losses are kept small you stay in the market which in turn increases your experience. But if you blow your account out in a matter of months by trading recklessly (risking too much per point) you won't get a chance to build the all-important experience.

I don't know the percentages and it's an educated guess but I would think at least 60% of profitable traders, ones who have made money over a multi-year period, struggled when they started out. Most of them though would have approached the market as I have suggested in this guide -

  1. Learn the ins, outs, and nuances of the game
  2. Start trading but in small size so as to keep your risk small
  3. Experiment with different strategies and learn from your mistakes, and
  4. Increase trading size only when profitable
This guide hasn't contained any secrets, there are none when it comes to trading. Instead most of it is common sense which I strongly believe is the best way to approach the game of speculation. You also need hard work and diligence as well as patience so don't try to run before you can properly walk.

As I indicated above there's a good chance that many readers will struggle for some time to make money. A common occurrence is you'll continue to break even with your profits cancelling your losses. But to me that means a significant battle (but not the war) will have been won as you're not losing money.

If you find this happens to you stay with what you're doing because you're generally on the right track. But look where your losses are coming from and work out whether you're either doing anything stupid or making unnecessary mistakes which can easily be avoided.

Then, to break into profitable territory it's not so much a case of getting more winners, rather cutting out on the number of losers. This is a far easier strategy than having to hunt for extra profits. Don't forget this point as it's important.

I hope you enjoyed reading this guide and will use its advice and strategies to create a rock solid set of trading foundations. Do that and as I said right at the beginning you'll be head and shoulders above the majority of new spread betting clients, the ones who take the game of speculation too lightly.

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