Special Feature
With a share trading account there is generally no leverage and so if you hold just 5 stocks then you have to be exceptionally unlucky to have all 5 go bust on you. Vice versa if you have 5 spreadbet positions and you are 5 times geared then just a 20% move will wipe you out. Let’s return to the headline question of this piece, that being, “Why do you spreadbet?” If it is to be “right” and to make big money quickly and/or for the “excitement” that leveraged trading brings, then unfortunately the evidence shows that you will likely be a net loser to the market. The market, remember, is a mechanism to take money from the unwary, inexperienced and impatient to the hard working, disciplined and patient investor.
Maximising the odds of success To maximise our own odds of success in the market we apply the following overlays: 1. Never leverage your account more than THREE times the net equity with regards to stock positions. By this we mean if you have an account of £10,000, the maximum underlying notional exposure will never be more than £30,000 in aggregate.
Compared with the constraints of a traditional fund manager, a well armed and competent spread bettor can materially outperform through (a) the judicious and appropriate use of leverage — leverage that a standard fund manager cannot embrace; (b) concentrated diversification with no regard for benchmarks — this is what really hamstrings most orthodox fund managers — “benchmark hugging”; (c) the ability to go short as well as long — not many traditional funds can do this; (d) sheer nimble-ness — unless you trade in the tiny AIM stocks, not very many private traders will carry unwieldy positions that cause a problem to get out of, whereas many funds effectively become stuck in positions and finally (e) the wonderful concept of the movable guaranteed stop — this really is spread betting’s biggest benefit — nowhere else, not CFD trading or share trading, can you pass the risk of a large “gap down” on, for a surprisingly modest cost (and subject to a typical minimum distance of 10% from the prevailing market price). Hopefully you can see that through relatively simple risk management principles that it really is possible to outperform a traditional fund manager without risking wipe out.
2. Never risk more than 6% on a trade — this is quite high for many traders, but my own personal success rate is over 70% and therefore statistically we can afford to run a higher drawdown on a non-performing position. 3. No one stock position is greater than 25% of the net equity. This means a stock can fall by 20% and it isn’t going to hurt us — something that actually happened recently in our Oil Explorers fund with Chariot Oil & Gas. I have learnt the hard way that putting too much capital into one position generally tempts “sod” and “law” to make an appearance. 4. With indices, we never risk more than 3% of our net equity on a trade and with currencies no more than 2%. My own personal success ratio on these is lower than the overall 70%. 5. Only trade when BOTH our technical and fundamental analyses align and be prepared to be patient. Sometimes your best trade is no trade.
58 | www.financial-spread-betting.com | December 2012