How to Spread Bet UK Shares Through a Financial Crisis

October 28, 2011 by tradingsimply2 54 Comments

If, like me, you are an active trader holding onto trades for weeks and months rather than years, then this post is aimed at you.

The three most important criteria to consider are:

Stop losses – because you understand that stop losses protect you from losing so much money that you cannot continue trading
Risk management – because you understand that risk management prevents you from financial ruin with the use of position sizing
Money you can afford to lose – because you understand that trading with money you cannot afford to use will mean you will not take enough risk or take too much risk. The market will also exploit your emotional need for a positive outcome on every trade; not all trades are winners!

These three elements are essential to trading and not just through a financial crisis.

Trading in today’s choppy markets

Watch where you are placing your stops

Global markets have become much choppier due to the financial crisis and because of the type of high frequency trading that the financial police are currently investigating. The most important thing I have adopted throughout the financial crisis is widen my stops and reduce the size of my spread bets to take account of this. This has helped me to stay in trades that go on to be profitable.

Adjust your position sizes

How To Spread Bet UK Shares Through A Financial Crisis

Size matters

Using larger stops means using less risk or a reduced position size. Larger stop losses means taking on more risk. Let’ stake a look at two fictional traders to see how this works in practice.

Tom opens a spread bet at a price of £2.50 and his stop loss is at £2.45.
Sarah opens a spread bet at a price of £2.50 and her stop loss is at £2.00.

Question: Who should have the larger position size?

Clue: As the difference between entry and stop gets larger, so does your risk.

Make sure you can afford to lose all of your money

If you are losing, do not add more funds to your account. Simply stop trading.

Go over past trades

The next thing to do will be to go over your past trades from your trading diary. Wait at least 24 hours before doing this to allow your mind to settle. I have in the past waited between 3-5 days before looking at anything stock market related after a losing streak. It helps me to focus when going through my trading diary.

A good trading diary should consist of the following: name of share, date of purchase, reasons for buying/shorting, price of entry, price of exit, win or loss and emotional state. This list is not exhaustive and your own diary will have elements that reflect your own needs.

When analysing your trades, look for ‘themes’ rather than finite detail. For example, are you setting stops too close? Are you trading in an unfit emotional state? Listing these themes will make it easier to add them to your trading plan’s guiding principles.

An alternative

Of course at the other end of the spectrum, you could not trade all through a financial crisis. All things being equal, I would trade through a financial crisis simply because of the volatility in price action would throw up so many different chart patterns and technical set ups.

Shorting is always an option during a financial crisis but I would not recommend it to newbies as you can easily get caught out with the increased volatility that comes with a financial crisis. Should you decide to trade through a financial crisis then the overriding focus should be on using sensible stop losses, using a good risk management plan and trading with money you can afford to lose.

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Any trades listed above are closed trades as I do not make public open positions.

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