Rather than the usual in-depth opinion pieces, over the next few weeks I’m gonna be stepping back a bit and aim a few articles at newbies. This one ‘ere covers a miscellaneous set of lessons which I’ve learnt the hard way and that I wish someone had handed to me when I started out.

I’m kinda hoping that this will turn into a ‘living document.’ So if you have some experience of spread betting let us all know what your ‘golden rules’ are. Don’t be shy! If they aren’t covered here (and I know there are plenty missing) then stick them in the comments area below. If I get enough comments I’ll edit this post and stick it back up.

So here we go:

Golden Rule 1: Never Trade With Money You Can’t Afford To Lose
This should be a no-brainer, but I’m gonna mention it anyway. Trading can be a way of making money but it is highly risky. Sorry, let me put that another way. It is HIGHLY RISKY.

Knowing what money you can ‘afford to lose’ is far from straightforward. One the one hand none of us want to lose anything. On the other how much we could afford to lose might be a barrow-full more than we’d ever even contemplate risking.

However as a rule of thumb try working out how much could disappear from your bank account (or from under your mattress, or from your credit line with the local cocaine barron) without you needing to make a big change to your lifestyle.

Now once you’ve worked this out don’t stick the whole lot into your trading account. Learn the ropes first. The demo account it there to help so use it. However, just like a lot of people still keep getting better at driving for the first year or two after they past their test, so you’ll (hopefully) keep on getting better with your trading. So start small. That way, if you lose all the money in your account (and it has happened to me more than once) you can chalk it up as a learn and start again.

Golden Rule 2: Be Mr Spock
Emotions are the nemesis of almost all spread bettors. They’re like the Klingons – necessary to add a bit of drama but big and nasty and there to be overcome (and notice I managed to avoid any lame jokes about Klingons around Uranus).

Emotions rear their ugly heads in several ways, for example when a trade has turned a profit it generates a variety of emotions. A bit of jubilation, of course, that we are richer. A bit of excitement from the adrenaline too. But also a sense of accomplishment as you feel your reasoning has paid off. That the trade went your way might have been a fluke but hey, that’s not going to stop you patting yourself on the back … possibly even mentioning your success to your mates down the pub.

Get two or three winning trades in a row and your perception of yourself may even change a little … you might even start seeing yourself as a winner, as someone who is good at trading. Hey, you are having fun and making money at the same time. What a combo!

That’s all very well but when the next losing trade comes along … you don’t want to lose all those positive emotions. So you ignore the loss … start making up excuses … wait for the trade to ‘turn around’ rather pull out. And after the first losing trade you stick a second trade back on, just so that you can prove that the first losing trade was a once off … that you are good at this really. And soon you are trading on hope rather than logic!

A second example is boredom. Spread betting, like any form of trading, can have times of enormous excitement. And it is easy to get hooked. So when the ‘duller than dishwater’ times come along, and there are plenty of these, what happens? You stick on a trade anyway to get some of those emotions flowing again just to have something … anything … happen.

So how do you counter these emotions (or lack thereof).

• The first, and most important thing is to become Mr Spock; calm, logical, ego-free. Pointy ears are optional but hey, if they help you get in character …
• Also try to recognise that, when trading, there is a fair amount of luck involved and your good judgement can’t remove that completely. All it can do is tilts the odds in your favour. Think of it as being like a bookmaker … some days the bookies lose loads but over the long run, as long as they get their opinions on the horses right, they make money in the long run.
• Technical Analysis really comes into its own as a way of removing emotion from a trading decision. You work out how to use the charts, then follow them.
• When faced with a ‘boredom trade’ you need to ask yourself what’s more important to you, the money or the excitement. If it is the former, don’t trade. If it is the latter, go for it. Or you could try introducing Mr Fork to Mrs Electrical Socket .. that’s a pretty good way of livening up an afternoon too.
• If you are trading full-time, you might also decide to trade more than one market. Regular blog readers will know that Mr FT mainly trades currencies but, if that market is too dull, he’ll dip his toe into the FTSE. However when starting my advice would be to stick to one market and get to know it well.

Golden Rule 3: The Trend Is Your Friend
Identifying a trend … essentially look for something that is going up and buy it or look for something that is going down and sell it. Simple but, in my opinion, its one of the surest ways of making money in spread betting. If you don’t believe me, take a look at a long term chart of oil or either Euro or Sterling against the US Dollar.

Whatever you do, don’t try trading against the trend. It’s like swimming against the tide. In shark infested waters. With a Mini Metro tied to your ankle.

Golden Rule 4: Never Try To Catch Falling Daggers
If an instrument is falling rapidly, don’t fall into the trap of thinking ‘There has gotta be a rebound soon’. And don’t think you can predict the bottom of a fall. You can’t, and no-one else can either. You might get it right once, twice even, but this’ll almost certainly be down to luck rather than any reliable method.

If you are looking to catch an instrument on the rebound then wait for it to steady first and begin to rebound before you buy into it. Trust me: it is better to lose some points on the rebound than find yourself having bought into something that’s trying to tunnel its way to Australia.

Golden Rule 5: Cut Your Losses And Let Your Profits Run
Whether you want to invest over 10 years or trade day-by-day, this might well be maxim that gets quoted to you most often.

It is quite possible to lose money on 60% of your trades and still make a healthy profit as long as your losses are small and your wins are large. Obvious huh? ‘course it is. Sadly though, learning to cut your losses is far from straightforward.

One reason is that we all like to think we are winners … and cutting your losses means admitting that you got that trade wrong. So we get back to emotions and ego again.

Also there is the infuriating situation where one day you’ll cut your loss on something, the next the price will bounce right back in your favour and you’ll be wishing you held on. When that happens, try to remember a few big losses can easily wipe out a lot of winning trades.

Golden Rule 6: Set Your Stop Loss – And Then Leave It Alone
Following on from above, the main tool people use to keep losses down is Stop Losses. So setting your Stop Loss is critical – so critical in fact that paddypowertrader is one of the few spread betting companies that will set it for you.

However while we do our best to be helpful, the paddypowertrader Stop Losses are set by a computer. There’s no human intelligence or strategy behind where the Stop Losses get put – just a fairly simple formulae. That means your best chance of success (according to me anyway) is to decide for yourself where the stop loss should be and move the automatic stop loss to that level.

Of course knowing where to put your Stop Loss is no easy feat … I could write several posts just on this. But to keep it short you need to make sure the stop loss isn’t going to get triggered by trading noise (i.e. the normal intra-day price movements that occur for no particular reason). Watching out for support and resistance is also a very good idea.

Moving your Stop Loss if the price goes against you is one of the cardinal sins of spread betting. If the price hasn’t gone the way you expected it to, something has gone wrong. Unless you understand exactly what has gone wrong – and when you are sitting on a loss emotions don’t often let logic take the mic – don’t make things worse. Moving your stop loss is a classic way for beginners to lose a lot of money.

Golden Rule 7: Keep Bets Small
The professional traders I know will keep the risk of any one bet pretty small. The definition of ‘small’ varies but can be anything between 2% to 5% of your initial capital. Some people will say up to 10% but I would only go that high in exceptional circumstances.

So let’s say you have €5000 in your account and you didn’t want to risk more than 5% on a bet. 5% of €5000 is €250. So you could put a bet on the FTSE for €2 per point and put your Stop Loss 125 points away -> the maximum loss is €250. Or you could put a bet of €1 on EUR/USD with a stop loss 250 points away – again the max loss is €250.

Keeping bets small can be hard, especially if you have €500 rather than €5000 in your account. However as you win and your account balance increases you can start to scale back the risks

Mr FT has also suggested that, especially when starting out, trading less volatile instruments are a good idea. Start with the FTSE 100 index rather than currencies or, if you do want to do currencies, try cutting your teeth on EUR/GBP rather than GBP/USD or EUR/USD. Oil is another volatile one that’s probably better as a main course than an appetiser.

Golden Rule 8: Get Shorty
A lot of people would rather buy – and hold – something than sell it and buy it back later. I kind of understand this; after all the idea of buying something and selling it is familiar; we buy houses, shares, maybe even a piece of art with the hope of being able to sell it later for a profit. However the idea of selling something you don’t own with the hope of buying it back later at a cheaper price – most of us just don’t have any past experience in doing it.

Nevertheless if you don’t get your head around selling short you are losing at least half of your profit opportunities. Going long without going short is like a car that can only turn left. It’s like Laurel without Hardy, salt without pepper, cable TV without porn … OK I might’ve overdone it on the last analogy but you get the point.

Golden Rule 9:If It Goes Wrong Call A Time-Out
Trading is a demanding way to make money. Too many losses in a row and the emotion of it all would get to anyone.

If – or rather when – it happens to you, my advice is to take some time out. Stick you head in the sand for a few days. Relax. Forget about it all. Then lower yourself back in gently, with a few small trades. A fresh pair of eyes can see more clearly than a tired pair.

Golden Rule 10: Learn From Your Mistakes
Spread betting is not a god-given gift; like any learning process there will be mistakes at the beginning. Hopefully this post will help you avoid some of the worst ones but there’s an even better tool you can use. It’s simple, it’s free and if you do it properly you may well learn more from it than any book or course.

So here’s the big secret: keep a trade dairy. It doesn’t need to be a complicated affair; just record what you are thinking when you make each trade decision – whether it is to open a bet, hold it open, close it, hold off for now or whatever. Once a few entries are written you can review what is actually making you money, and what is harming you. Here’s a sample from my trade diary from July ’07, just to give you an idea.

Your losses are your lessons. You’ve paid for ‘em. Sometimes you’ve even paid over the odds for them. So for the fat friar’s sake make use of them.

OK, that’s the lot from me for now. As I said at the start, whatever your lessons have been share ‘em out. Use the comments section below and share your wisdom … or your foibles. We want to hear about it all!