Controling Risks when Spread Betting

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You must quickly appreciate that losses can accrue very quickly when spread betting. One method that you can deploy in order to minimize your risk exposure is to utilize stop- loss controls.

To accomplish this objective, you will need to agree a limit with your spread betting broker whenever you instigate a new trade which will define the maximum sum of money you are prepared to lose on each bet. Consequently, should price then unfortunately advance against your position, this pre-arranged stop-loss will automatically close your bet in order to prevent excessive losses.

 

Stop Loss Example

Envisage that your spread betting broker has quoted you with a spread of 225-226 at $10 per point based on the shares of a particular firm. After undertaking fundamental and technical analysis, you opt to short this company as you conclude that its shares will decline in value before expiration. However, as you are also concerned about the risks involved as price could rise instead of falling, you instigate a stop-loss by requesting your broker to locate it at 230.

Consequently, the maximum loss that you should now suffer if price proceeds against your position is (230 – 225) times $10 equaling $50. When activating such a protective strategy, you must appreciate that your stop-loss may not be activated if a sudden bullish price spike occurs. This is because there may not be enough time under such circumstance for your stop-loss to cut-in and close your bet.

You can resolve this problem by asking your broker to implement a guaranteed stop loss in order to completely safe-guard your equity. Such a facility normally entails a fee as your spread betting broker would then be totally liable for all losses resulting from any event that failed to activate your agreed stop-loss.

 

Introducing Money Management

After you have purchased or created a spread betting strategy, one of your next objectives is to attain a very good appreciation of the theory of money management because this knowledge will be vitally important in defining just how an effective spread betting trader you will eventually become. No matter how good the quality of results your strategy produces, it can still be significantly enhanced by incorporating a proven money management strategy with it.

You can use a money management strategy as a technique to assist you in evaluating a sensible percentage of your total account balance that you should wager per trade. For instance, if you were to expose too much per trade than you may not acquire the maximum potential returns that your strategy could be capable of generating if your positions are constantly recording losses.

After you have produced a proven money management strategy, then you should always operate it in compliance the following revered maxim which advises: ‘do not expose too large a percentage of your equity on any one trade’. If you adhere to this recommendation, then you will increase your ability significantly of progressing your spread betting knowledge and skills in small stages of increasing risk whilst providing your account balance with optimum protection.

 

How Much Should You Risk Per Trade

Many professionals advise that beginners should utilize a straightforward money management plan which recommends that they never wager more than a pre-defined percent of their entire equity on any one position. Specifically, 2% is the optimum amount advised. You can limit your risk per position so that it complies with this requirement by accurately determining a stop-loss for each bet you execute. Your stop-loss defines the number of points that you are willing to risk per bet should price advance against your position.

 

Preventing Margin Calls

One of the reasons why risk and money management are so important is that you can use these concepts to prevent margin calls. You will find that margin calls can be one of your biggest problems when you start your spread betting career and you must take serious measures to eliminate them as a top priority.

Your spread betting broker will activate a margin call if your spread betting activities become so out of control that they begin to expose its own money to serious risk. A margin call is generated if your account plummets to zero implying that you do not have enough funds left to support your open bets. Should such an event occur, then you will have to suffer watching all your open positions being closed immediately.  In addition, if any of your trades were posting losses, then your balance will be reduced by their combined total. In fact, margin calls are one of the fastest ways to completely destroy your entire equity.

After you have experienced the demoralizing influences associated with margin calls, you will then have to attempt to reconstruct your motivation and confidence so that you can start trading again. You will find that this may not be an easy process because margin calls can produce long-term negative psychological effects. This is why experts assertively recommend learning the concepts of money management as quickly as possible so that you never have to content with the nightmarish problems associated with margin calls.

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