Top 5 Mistakes New Traders Make
1) Over leverage
There is a reason risk warnings are plastered over everything to do with spreadbetting – contingent liability and margin trading allows you to increase your trading exposure. But leveraging to the max is a bad idea. If you use all your free capital on initial margin it means there is nothing left for variation margin. Variation margin is the deposit required to cover the profit or loss on your open positions. So always make sure you have enough free equity to cover any potential loss you are prepared to take if your trade does not go into profit straight away. Without it you will simply be cut out by your broker for not being able to cover your losses. Very embarrassing and an appalling trading strategy.
2) Not cutting losses
Don’t chuck good money after bad. If a trade is not going right cut it. Or better still have a preset stop-loss in the market to limit your downside exposure. Figure out how much you can afford to lose on each trade and give yourself some protection. There is an old City adage – ‘the first cut is the cheapest’. If you are long and the price continues to drop it can be a good buying opportunity to get in lower. Try and avoid the ‘averaging down trap’ – you’ll end up like a dog chasing their tail.
3) Thinking it’s easy
It’s not easy. Whilst spreadbetting is generally marketed as professional trading for everyone it still relies on the principle that you are taking £10 and buying £100 worth of stock with it. If the stock halves you lose £50 (£40 more than your account balance). It is high risk and stocks, FX and commodities have been the ruin of many a good man. The markets are hugely complex beasts and deserve to be treated with fear and respect. Do your homework, set you stops, plan, enquire, practice and most importantly, take profit when you see it.
4) Being greedy
Another City adage (there are lots of them) ‘Don’t be a pr*** for a tick’. It basically means don’t get too greedy and try and hold out for that extra penny move. If you’ve bought at 150 and it’s trading 198 don’t bother holding out for 200. It’s a natural resistance point and there are probably larger traders with limits that will push the price down before spreadbetting quotes get near it. You could end up seeing it back down at 160 before you close your position. Take healthy profits when they are there and don’t worry about odd tick – it’s simply not worth it.
5) Don’t be narrow-minded.
Some people will tell you that when trading you should stick to a couple of stocks or one FX pair and only trade that. I disagree, the problem there is that traders are like hunters, always on the look out for the next buy or sell. And if your product universe is too narrow sometimes the trade simply won’t be there. Often the best place for your money is in the back if you are looking at three or four products. Expand you range – seek out commodities, exotic FX pairs (don’t get involved in anything illiquid though) and European and US stock. There is always a trade in the market, always a 52 week high being broken, always a new oversold signal to take advantage of. But never force the trade, ‘don’t fight the market’ it’s bigger than you. Ride the momentum and go with the flow – you’ll find trades if you go out and look for them.
About the author: Richard Berry is former broker who started his career back in 2000 on the NYMEX Crude Oil trading floor in New York for Man Financial. Since returning to the UK Richard was a stockbroker at King and Shaxson and Walker Cripps, then joined Man Financial/MF Global again as a derivatives broker for the past 6 years where he also sat on various committees. He now runs www.chartoftheday.co.uk which helps traders expand their product universe by providing varied technical analysis and comment on daily charts.