We recently looked at the loss percentages of spread betting and CFD brokers. But why do so many traders lose money?
I’ve been a broker for nearly 20 years and dealt for pretty much every client out there. From the absolute spread bet beginner to $100m hedge funds.
In a nutshell it is because they are amateurs. The tax advantages of spread betting only apply to individual investors. So professional traders will be trading through a commercial vehicle or tax-efficient structure anyway.
So by its very categorisation of the spread betting client base, they are the least likely to make money.
The second reason is that clients do not, in general, follow some fairly basic rules of investing i.e don’t overleverage, don’t over trade, cut your losses and run your profits.
Over leverage when spread betting
This is an easy mistake to make as when you think you have a good trade idea, you want to try to make as much money as possible.
You set your trade to take up as much margin as possible. The problem with this is that it doesn’t leave much room for error. In trading, you need breathing space for when a trade does not go your way straight away. If the trade moves against you and you can’t afford to run a small loss to start with you will be on margin call and the broker will close your position because you can’t afford it.
Overtrading on spread bets
There is not always a trade in the market and trading just for tradings sake will lead to quick losses early on. Traders who are new to the market must be patient and wait for the fundamental and technical indicators to be right before execution.
Cutting your losses and running your spread betting profits
This is a key element of trading. Most professional traders only get it right about half the time. But they win because the can spot a good trade and let it run. More importantly, they can admit when they make a mistake and cut the position.
This is vital strategy and most new spread betting customers get too emotional. They hope on hope that a bad trade will turn around, but get too excited or scared when they turn a profit and close it out too early.
If you want to learn more about trading, read our ultimate guide to spread betting.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.