Don't Over-Trade: Dangers of Over-Trading
When it comes to spread betting, traders tend very easily to get caught up in the idea of highly leveraged earnings. As a result, a number of common trading errors are made, most notably over-trading. Over-trading happens when traders open too many different positions at one time, eating in to their capital and posing cash flow difficulties in covering losing positions.
For example, a trader might up his exposure to different positions to account for 50% of his trading capital, in the belief that this will result in a substantial pay day. Unfortunately, this often leads to problems when positions inevitably head south, and without the trading capital to offset these losses, traders can quickly end up in hot water.
Over-Trading and Over-Leveraging
Over-trading and over-leveraging are two distinct problematic scenarios that can arise through greed and a lack of foresight. Over-leveraging is where a trader enters a position too heavily, staking an unsustainable amount per point which can then multiply as markets move in an undesirable direction. This can quickly eat into trading capital, and spark off a downward spiral of chasing losses, which seldom yields positive results.
Over-trading, on the other hand, is where the trader invests too much of his trading capital at any one time, thus tying up too much capital. With too many positions and potential liabilities to cover, this can leave the trader needing to deposit more money to cover his liabilities and can lead to the exact opposite effect of the intended consequence.
Bear in mind that no one takes these decisions with the intention or knowledge that they are over-trading - they are simply taken with the possibility of earning significant returns on multiple different positions, and don't keep sufficient capital in reserve to cover for every eventuality. When trading in any highly leveraged medium, keeping sufficient reserve in capital is essential to cover wayward trades, and to keep your head above water if things don't quite go to plan.
How to Make Sure You Don't Over-Trade
The first thing you can do to prevent over-trading is to think about your overall strategy. Spread betting doesn't require you to smash it out the park to become successful. If you can earn a 1% return a day, you'll increase your money by over 33% in one month, and you'll have more than doubled your pot after 90 days. That's at 1%. Try getting those returns from the bank.
This doesn't require you to be over-leveraged - a secure, steady rate of growth will quickly mount up to add to your account, while helping to minimise the risks of having too many, too heavy positions. With just a few careful, thought out positions of a sufficiently small size to protect your capital, generating returns in the ballpark of even just 1% can be an extremely profitable way to trade over time. Don't get greedy - by trading within your limits, you can make more in the long run.