This is the first part of a 7 part article I have written titled “The 7 Deadly Financial Spread Betting Mistakes”. This 7 part series should be read in conjunction with my previously posted 7 Rules of Successful Financial Spread Betting
Today we will discuss the first of the 7 financial spread betting mistakes that financial traders make.
Mistake # 1 Giving losses more room
This is one of the biggest mistakes, if not the biggest mistake a financial trader can make.You must cut your losses short. You must never move your stop loss back when the price is approaching your stop loss to keep you in a trade in the hope that the price will turn around. Occasionally this may happen but over time you will lose more money by giving your trade more room.
In some instances this mistake can lead to you taking such a large loss that you cannot recover from it. The important thing is to never take a big loss. You can ensure that you never take a big loss but cutting your losses short and sticking to your pre determined exit point.
One of the main reasons that traders move their stops back is their unwillingness to admit that they are wrong. They would rather move their stops back in the hope that the market turns around even if this means they take a bigger loss than they would have previously than take a loss. This is such a huge mistake that it can’t be overemphasised how important it is not to do this.
I often think that many traders are more concerned with their egos than their profits as they are more concerned with being right than they are with making money. This prevents them from admitting they are wrong on trades and taking losses. This accounts for a lot of the nonsense that is out there pertaining to a high percentage of winning trades.
A high percentage of winning trades is in fact a fairly meaningless statistic as what really counts is how much you make when you win and how little you lose when you are wrong. These systems of high winning trade percentages have it the wrong way around in that when they win they win small but when they lose they lose big. This is the opposite of how successful traders and trading systems work.
You must trade with a plan. You must decide where you are getting out of a trade before you enter it. You must decide how much you are going to risk on a trade and then stick to that plan. It is imperative to add a stop loss to your trade when you open it, and not adjust your stop regardless of what happens.
You must always decide before opening any trades how much of your account equity that you are going to risk on any particular trade and must set your stops accordingly. If the market approaches that level you must resist the temptation to move your stops back and stick to your system.
Traders suffer from what I call immediacy bias in that they always want to improve the trades that are right in front of them that they have open on their accounts now. The current trades for that reason seem to take on more importance than they should. It’s just another trade and when viewed from the larger picture of the few hundred or so trades that a trader will make during the course of the year, it’s not so important.
What is important is sticking to your trading system and trading rules as it is the consistency in following these rules that brings in the profits over time. If your trade goes wrong, admit that you were wrong and take your medicine and exit the trade. This way you can live to fight another day and give the positive expectancy that your trading system has the chance to come to the fore.
It’s the staying in the game over the long period that makes the money. A trader must always be mindful of the risk of ruin as the worst thing that can ever happen to a trader is that he loses his money and can no longer trade. By sticking to a good trading system and consistently following the trading rules of that system this should never happen.
With financial spread betting, it is even easier to move your stops back to keep you in a trade when it is going against you as you only need to spend 2 seconds adjusting your stop on your financial spread betting account, rather than having to pick up the phone to speak to your broker. You must resist this temptation and have the discipline to stick to your trading system.
The more mechanical and automated your system is the better you will be as a trader. This means that you should always exit your trades via the stop loss whether it is for cutting a loss or for taking a profit. Remove emotion and discretion as much as possible from your trading and you will be much more successful and profitable as a trader.
If you cut your losing trades short and allow your winners to run, your losing trades will be smaller than your winning trades. This will mean that you can afford to be wrong more often than you are right and still end up making money.
I will be posting the second of the 7 financial spread betting mistakes in the next few days.
Good luck in your financial spread betting