Spread betting has many advantages, and the potential to give traders excellent returns on investment. However, there are some mistakes that people make, which can lead to problems such as negative positions and cash flow issues. Here are two common mistakes, and how you can avoid them.
When things are going well, sometimes an investor will be let greed get the better of him, forgetting that not every position will be a winner. This mistake arises when an investor has too much of his trading capital tied up in different positions. For example, an investor might put 50 percent of his capital into a number of open positions, foreseeing only a wonderful profit.
The danger of over-trading in spread betting is that if some positions head south, which is likely to happen at times, this investor could be left without enough capital to cover the losing positions. This creates cash flow problems for that investor, as he must scramble to cover his losses. The investor did not allow enough capital to offset those positions, due to a lack of foresight and failure to think through possible scenarios.
Over-leveraging is a different type of mistake, though it can be driven by the same combination of greed and inadequate foresight. With this situation, a trader has made a considerable investment in a single position. They place so much on this one bet, that if this market moves in an opposite direction to what they want, the loss on this one position starts eating into their trading capital, and can quickly lead to a downward spiral.
Whenever you are working with a high-leverage investment, you always need to maintain enough reserve capital to cover any scenarios that don’t go your way, keeping your head above water and preventing the situation from escalating.
How to Avoid these Spread Betting Mistakes
Nobody would knowingly put themselves in the position where their over-leverage or over-trading cause a difficult result. Instead, people put themselves in these situations because they focus on the potential returns they could make if things go their way, while ignoring or glossing over the potential results if things do not go their way. This leads them to end up without enough trading capital to handle a problem situation when it occurs.
The first thing to realize is that you don’t need to hit the jackpot on your trades. No matter how certain you think a particular position is, do not put too much of a stake on that, and you don’t need to have a lot of different positions, either. If you could make just 1% return each day, you would have added a third to your capital in just one month. After three months, you would have more than doubled your money.
A sound strategy for spread betting is to have just a few positions which are carefully thought out. None of these should be too large. This way, you are protecting yourself from both over-leverage (with only small positions) and over-trading (with only a small number of positions). You can minimize your risks this way, while generating a slow, steady rate of return.