One of the risks you run when spread betting is the risk that you will make mistakes. Trading mistakes can take many forms, and some of the most common ones are:
- You click the ‘sell’ button when you meant to click the ‘buy’ button, thereby going short instead of long.
- You place a bet on a commodity or foreign share in your spread betting account without first checking whether your £1-per-point bet will in fact be equivalent to £100-per-point because that particular instrument is priced per-0.01 units; hence you unintentionally increase your risk by a factor of 100.
- You sell a £4-per-point bet to close a long £5-per-point position, thereby leaving a residual (and unintentional) £1-per-point bet in play.
- You place a stop order at 100 points below the current price when you thought you were placing it at the 100p price level, because you mistook the ‘stop distance’ box for the “stop level” box on the trading ticket.
- You bet on a UK 100 December contract when you meant to bet on the UK 100 Rolling Daily, and you based your stop placement on the price chart for the latter.
These are some of the more common mistakes you can make, but by no means all of them. You’ll discover several more of your own, which will lead you to the question of…
What to Do When You Make a Mistake
Experience has taught me that the best thing to do when you make a mistake is to immediately correct it by closing your unintentional position at a loss if necessary, rather than hanging on in there and hoping for the best.
Be sure to distinguish mistakes – i.e. things you did by accident that you never intended to do – from trades that simply went the wrong way. A “failed trade” is not necessarily the kind of mistake I am talking about here.
A Parting Note
A section devoted entirely to risk management is bound to have set alarm bells ringing in some spread bettors’ minds. On the contrary, the message should be that if you master risk then you no longer need to worry about it.
An analogy: once you’ve passed your driving test and you take to the roads, you need to be aware that accidents can happen, but you need not be overly worried every time you get behind the wheel. Your tutor did teach you how to do an emergency stop, didn’t he (or she)? In order to encourage a healthy awareness of risk but not an obsessive worry about it, I draw on two inspirational quotes:
The first quote is:
“For every ailment under the sun,
There is a remedy, or there is none;
If there be one, try to find it;
If there be none, never mind it.”
The second quote is:
“God grant me the serenity
To accept the things I cannot change,
The courage to change the things I can;
And the wisdom to know the difference.”
Finally, remember that – because risk cuts both ways – you need to accept some downside risk in order to enjoy the possibility of upside risk.
In this section I have focused on risk: what it is, and what to do about it. Risk management is of the utmost importance, and as I stated earlier: the even best very opportunity identification (e.g. clever stock picking) won’t save you from an extended run of bad luck if you fail to manage your risk.
Not wishing to overly alarm you with my foregoing coverage, the important thing to remember is that risk doesn’t have to be risky!