Spread Betting Tips for 2014 and Beyond!
The following thoughts are what has worked for me so far. I certainly wouldn’t claim they apply every time or for everyone but I wanted to put my thoughts in writing and provide some useful tips to would-be spreadbetters or those relatively new to the subject.
What to Do and What to Avoid
Avoid making too many mistakes – sounds obvious but who said trading needs to be complicated? You need to strive to make the most of the advantages and flexibility offered by financial spread betting without getting hit too hard by the downsides, because inevitably you cannot get it right all of the time.
#Money management is critical.
Too many hours spent at poker tables have taught me the importance of not going bust. As long as you’re in the game, you have a chance. In retrospect, the wisest thing I did was to bet very lightly when the market lurched downwards in October. The portfolio’s net loss was 4% at the worst point – worrying at the time but not enough to induce panic.
#It’s not so much what you buy, it’s what you do afterwards.
Well, OK, stock selection is also vital but the oldest rule in the book is best: cut losers and let winners run. Or, as one trader puts it: “Being wrong is acceptable but staying wrong is unacceptable.” Cutting losers is hard in practice: the temptation is to believe things will improve if only you wait. But failing to cut losses cost about £100 apiece at Vodafone and BP. Equally, letting winners run has mostly been rewarding. Rio Tinto, my largest position, has contributed profits of about £450. According to the Nobel prize-winning Professor Daniel Kahneman, traders place far greater emphasis on losses than on profits. As a consequence, they hold too long (to avoid the pain of loss) and close their winning positions too early (for fear of losing what they’ve won). Some people actually find profitable trades more stressful than losing ones; they take hair-raising risks on the downside and are mice on the upside.
#Exploit any edge.
I’m trading FTSE 100 and FTSE 250 stocks almost exclusively. I can’t hope to compete with City analysts who have more time to study fundamentals and greater access to managements. So I have paid more attention to indicators of “buzz” or momentum. It’s hardly sophisticated but look at Vodafone, possibly the most over-researched stock in London: it was a buy until 2000 and a sell thereafter.
Momentum prompted me to look at Carphone Warehouse, which has been a stellar performer for the portfolio. I bought soon after the shares cleared 200p and added to the position as the price continued to rise (now 277p). Carphone’s run has been stronger than I could reasonably have expected but that’s the point about momentum: it can last longer than you think. When it evaporates, rule two applies: get out.
#Think big.
Producing a good stock idea every week is, I suspect, impossible. But I have stuck with two long-term themes. First, that the recovery in Japan, after a 10-year bear market, could still have a long way to go. Second, that the cycle in commodity prices moves in decades, meaning mining companies could continue to enjoy high prices for their products: “stronger for longer” is the jargon phrase. So far, both bets have gone well. In the case of Japan (where my exposure is via an investment trust), sceptics abound but trying to call the top seems to me a mug’s game. Take a step back: the Nikkei index stands at 16,000 and even a further 25% rise would merely take it to half its all-time peak.
#Avoid churning.
In the early weeks, I was guilty of switching in and out of positions. It’s expensive, even when, like me, you’re trading via spread-betting. The line between churning and actively cutting losers can be frustratingly fine but you have to give shares a little time to perform.
#Don’t overtrade.
Spread betting allows you to get in and out of positions instantly – and this is what makes it so attractive yet potentially so dangerous – the ease of access and frequency of the game. We know that the markets are risky yet it is not the markets which make mistakes but us humans. Most beginners fall in the trap of overtrading even when told that the real opportunities are few and far between.
#Information overload.
Learn to tell the difference between paid commentators who talk/write because they are paid to talk as journalists and fill space in tabloids and those who are experts in their field.
#Shorting is tricky.
There are only so many ways shares can move – up, down or sideways. The reality of betting on falls is that profits can evaporate quickly, especially in a bull market. I can claim to have made only one good shorting call, namely Empire Online. Even there, though, I was spooked by a minor rally in the price and failed to capitalise fully.
#Be flexible.
This is my golden rule: adapt to conditions. It’s why I’m not making any grand forecasts for 2009 that could look hopelessly wrong even by spring. I’d rather see what comes and react then. Indeed, the lessons of the next 12 months could be very different: as I said, this is all about learning from experience.
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