OK, let’s start with the cold hard facts – spread betting is, quite simply, trading in a tax free manner and, let’s not make any bones about it, trading is not easy.
If even revered traders like John Paulson (he of ‘The Greatest Trade Ever’ fame) who made billions shorting the US housing market in 2008 find it hard to make money at times… just think back to 2011 when his fund was down 50%.
If ‘great traders’ can rack up consistent losses then what hope is there for the rest of us?
That is not to say that profits cannot be made and hey, when they’re tax free, then the ‘carrot’ will tempt the best of us.
However, new spread bettors and CFD traders should be beware.
If you think this is a bump-free road to riches then you are in for a very rude shock…
There is already a plethora of books and websites out there with guidance on how to trade.
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What you will read below is however, written by someone who has been an active spread bettor for over 10 years and has seen much of what the markets can throw at you.
It is easy to recite glibly ‘cut your losses and run your winners’ as if this will ferry you to the hallowed ground of assured profitability but, as any seasoned trader will tell you, it is not quite that simple.
Another much held mantra by so called stock market pundits is “you never go broke taking a profit”.
Well, let me give you a real example of how these so called ‘rules’ can actually work to your detriment.
Back in mid-2009 I bought quite a number of Gulf Keystone shares at around 10p a share and within a few days the stock had risen to 16p handing me a nice 60% profit – even more on the invested capital given the leveraged basis of the trade, and so I took the profit thinking what a clever chap I was.
The rest of course is history as the stock, at the last look, was a shade over 400p.
There are two aspects of this particular trade that are important to me when looking back and that is:
warning “You never go wrong taking a profit” was very definitely the wrong thing to do here as, if I had not taken the profit, then I would be a multi-millionaire now. Of course there is no way of knowing in advance that a stock will deliver these types of potential life changing returns, and it is the game of ‘hindsight’ I’m playing now but the lesson to me is that when it comes to potential ‘multi-bagger’ stocks like oil explorers, biotech and high end technology plays, then it does not pay to take ALL your profit, rather I should have taken my original capital out and run with the rest.And of course, I could easily have lost my nerve when the stock hit 100p, 200p, 300p etc.
warningThe other important element that was de-bunked was the ‘cut your losses’ advice.After I bought the stock at 10p it promptly fell to 7p as the last remaining sellers exited the stock at that point. Of course, the stock had been in a very long downtrend and at the time there was some quite heavy director buying as the stock was making its final lows.
The lesson here again applies specifically to stocks and not indices and currencies and that is, when entering a position in a company that is in the latter stages of a downtrend then stop losses just may take you out at the bottom. Remember though that this caveat to cutting losses is, in my opinion, applicable only to stocks and not indices – the leverage inherent in indices and currencies invariably means that your ‘first cut’ indeed usually is your ‘best cut’.