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Time for spread betting?

Cover of The Naked Trader's Guide to Spread Betting by Robbie Burns Is spread betting right for you? I've just written a book on this subject because I wanted to answer the question: Should investors, as well as traders, be spread betting?

I think the answer is 'yes' - it's a great tax-free way to make money whether the market goes up or down ... but not everyone is suited to it.

And that's confirmed by various figures on the number of losers. More than 90% of daytraders lose for a start. And the figure for those who don't trade that much is still over 70%.

Why is that? Spread betting sites are very addictive. The spread bet firms - or perhaps we ought to call them bookies - make money every time you trade so therefore they want to make it as easy as possible.

New entrants to spread betting tend to go crazy as there is no commission (you pay extra spread instead) and trade way too much then wonder why they lose.

I received lots of horror stories for the book from users of my website - nakedtrader.co.uk. There's a whole chapter of these and the chapter itself contains so much helpful info - things that have gone wrong or right for real people.

From all this I must warn beginners of the silly mistakes that can be made with spread betting - little mistakes which could turn a potential winning account into a losing one.

The biggest thing that can go wrong with spread betting, I reckon, is placing a stop-loss in the wrong place.

I got bunches of aggrieved tales. Lots of wailing about "The spread bet firm deliberately stopped me out and I lost, the rotten stinking ******* ** **** **********!"

Conspiracy theories abound of shifty blokes in dark corners deliberately taking out stops. Having visited a number of firms, I'd say it's not true - it's a shifty computer that takes you out.

The lesson about stops is easy. They should never ever be set too close to an entry price.

It's mad, for example, to try and buy the Dow Jones at say 10500, setting a stop-loss just 30 points away. The Dow is so volatile, that stop is too tight. A losing bet from the moment it was placed. Oh, and that was a real bet made by someone.

On shares and indices, my stops would be well away from the current price. One thing betters forget is that at 8am spreads can be wide at the start of the day and stops can be taken out on a silly spread.

It's always worth going through your stops every evening to check you won't get stopped out at 8am.

What about other things that can go wrong?

Well, overusing the leverage or credit you get. For example if you deposit £10,000 you'd be able to buy £100,000 worth of FTSE 100 shares.

Traders often blow out because they overuse the leverage. One firm told me it had someone open an account with a small amount and got their winnings to millions. But the person went crazy using the credit and ending up blowing all his winnings and even ended up owing the firm.

So here's my list of the biggest mistakes you can make when spread betting:

* Allowing positions to run away to huge losses. Always use a stop but never set it too tight!
* Trade Forex. Nearly everyone loses.
* Over-trading. Going bonkers and trading a few times a day. It will end in disaster.
* Getting emotional. It's a business. Don't fall in love with any share.
* Buying against a trend. Trying to spot a turning point in the market is impossible unless you're lucky.
* Not running profits. Good positions should be held. No point in taking tiny profits and big losses.

Remember, spread betting needs tight discipline and a cool head. And you need a trading plan. What is your exit strategy and when will you take a loss?

I guess if there is one abiding thought for those thinking of starting it's: take it slowly and steadily.

Learn about it as you go and start with small stakes. Take your time with trades and let them develop.

One final thing to remember: you aren't buying or selling real shares - you are in essence playing with a bookie. You can beat the bookie but it might not be easy. Go slow... and best of luck!
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