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Spread Betting is Not Bad - But Getting Trapped in a
Share Down Spike and Averaging Down is Bad!
By
[http://ezinearticles.com/?expert=Andy_Richardson]Andy Richardson
I often hear traders commenting on boards on what a 'bad' thing spread betting is, as though it was somehow morally reprehensible. I say nonsense! People should listen to themselves and the things that they say and understand how outrageous they sound; they would be the first to smile smugly if they put on a spread bet and it romped home with healthy profits and if they claim they wouldn't then perhaps they shouldn't be trying to make any more money than what they earn or what they already have!
I suspect that what normally really happens when one opens an account (and speaking from experience) is that the punter goes for a stock and punts his required bet. The market usually moves against him and being a cautious individual he puts a stop on at 10%-15%. The stock drops and then the punter panics then he cuts and runs.
I have been caught out with down spikes in the past and being only human the fear kicks in. The Financial spread betting handbook by Malcolm Pryor is excellent and gives a clear strategy to trading. Regarding my own trading I set a maximum £ per bet and instead of hitting it in one trade I filter in to market when the opportunity arises.
This is not averaging down because of my initial loss but using the tricks of the market makers to my advantage. I have a mental stop in place which I will exit and admit defeat; for instance if I'm invested in Dragon Oil security and it hits my mental stop I'm out never to revisit.
There are a couple of examples of late - Telecom Plus (TEP) shake to £2.50ish and PVCS shake to £1.49ish to mention just two. Admittedly it is very hard to distinguish between shakes and relevant drops in share value, but with time one gets more used to the ways of the market however stressful it is at times but with a plan of money management it can be achieved I believe, welcome the debate again ;)
The subject of draw downs in itself is quite interesting and I admit that I have bought and held to a few things at the wrong time, AFR security being one. I ended up selling 1/4 of my holding for a 29% loss and a further 1/4 for a 32% loss. I did this because those losses had reached 1/2 a percent of my portfolio and that's the maximum portfolio drawdown I was willing to stomach. I still have 50% left and both are running at a loss.
I have decided to hold but will not be averaging down and they will both go should they hit -30%. I regard this as one of the worst trades I have ever done. My timing was awful and I didn't sell for a small loss. I don't know what I was thinking. But if I had to answer that question, I must have been thinking that somehow it would buck the trend and the trend for oil and gas is DOWN. Why should Afren Plc Share (AFR) buck the trend I now ask!? So there we are; thinking damages your short term wealth!
However, my averaging down on TEP was perfect and the thought process was the same. So there we are; thinking can enhance your short term wealth ;-)
In other words....it's very hard to get it right. And guess what, the Telecom Plus Share Price (TEP) gains have offset the Afren Plc losses...which makes me, does it not, perfectly hedged. ROFL. [http://www.financial-spread-betting.com/]Spread Trader is the nom-de-plume of Andy Richardson a UK based spread trader, who like his inspiration, the late Jesse Livermore is a student of the markets and plays a lone hand. Resident financial spread betting expert Andy publishes a question and answer [http://www.financial-spread-betting.com/Spread-trading-faqs.html]spread betting guide where one can find objective spread trading information.
Article Source: http://EzineArticles.com/?expert=Andy_Richardson [http://ezinearticles.com/?Spread-Betting-is-Not-Bad---But-Getting-Trapped-in-a-Share-Down-Spike-and-Averaging-Down-is-Bad!&id=1373540 ]http://EzineArticles.com/?Spread-Betting-is-Not-Bad---But-Getting-Trapped-in-a-Share-Down-Spike-and-Averaging-Down-is-Bad!&id=1373540
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