Important Aspects of Money Management

23Money280813If you are a novice then that there are two basic methods of money management that you can utilize in order to spread bet successfully.

The first one will involve you in attempting to acquire profits from a few large winning trades supported by small stop-losses. Alternatively, you would try to target many small profits using very large stop-losses with the aim that the total of your many small profits will exceed that of your few large losses.

Which particular strategy you choose will depend greatly on your personality. You will discover that experts have design spread betting strategies that work well with both approaches. Whichever way you go, you must ensure that you persevere with your choice and not give up at the first sign of difficulties.  You should also realize that the cost of each of your spread bets is identical whether it is big or small because spread betting is a spread-based industry.

For instance, if you select to execute a spread bet using the EUR/USD as its underlying asset then you will discover that its spread is often quoted as 2 points, e.g. 1.3310:1.3312. Consequently, this spread size will be constant whether you want to trade using a large or small stop-loss. However, as your transaction costs per spread bet equal the spread size times your risk per point, then it will increase with the amount you are prepared to risk per point. For example, imagine that you decide to wager £10 per point. If you now open a spread bet, then you will be charge a commission value of 2 * $10 times equaling $20. However, if you risked $50 per point, then you will be charged $100.

Consequently, you can select various styles of money management strategies because spread betting supports uniform pricing and you do not need to worry about variable transaction costs.

 

Providing Protection against Drawdowns

You may have already encountered drawdowns whilst spread betting.They are very unpleasant events and you must instigate appropriate policies as quickly as possible to eliminate them in order to protect your capital. For example, have you already suffered from the following spread betting situation?

Imagine that you have just lost 50% of your funds as a consequence of one losing spread bet. This result implies that if you originally had a fund of £1,000 it would now be worth £500. As such, in order to recoup the initial value of your capital you now need to record a win equal to 100% of your new account balance.

Whenever you incur such a loss as in the above example, it is known as a drawdown. You must attempt to avoid them at all costs because as you can see they can have a devastating effect on equity. For instance, imagine that your initial fund was£ 1,000 and you recorded alternating results of 20% loss and 20% win over 10 spread bets. Consequently, you would obtain a trading record as follows:

£1,000; £800; £960, £768, £921; £737; £884; £707; £ 849; £ 679

As such, you can verify by studying the above figures that recovering from losses becomes increasingly harder as a result of drawdowns. You can prevent such situations from developing by using a well-tested spread betting strategy exhibiting a positive risk-to-reward ratio. This parameter defines the quotient of maximum risk and maximum reward for each spread bet that you open.

You can best achieve this objective by acquiring a good appreciation of risk and money management strategies. For instance, many experts advise that you should never risk more than 2% of your entire account balance per spread bet. You can then calculate your risk per point and stop-loss size so that they comply with this strategy.

You next need to calculate your profit target so that your new spread bets exhibit a risk-to-reward ratio of at least 1:2 in order to optimize your protection from drawdowns. However, by doing so you must understand that your target profit will be twice the distance away from your entry point as your stop-loss.

Consequently, you require a method so that your trades can hit their target profits more often than their stop-losses. You can achieve this objective by designing a spread betting trading strategy that boasts both a positive win-to-loss ratio and expectancy value. You should then acquire trust and confidence in its performance by back-testing it using historical data.

 

Surviving Your Initial Months of Spread Betting

You must try and erase the images created by the intense and endless barrage of spread betting publicity and adverts making you think that you will become very rich in no time at all. You must understand that even if you use all the most powerful spread betting tools available that you will earn nowhere near the profits that a spread betting expert will do.

If you are a novice at spread betting trading, then you must take great care especially in your early months. This is because you have yet to acquire a good appreciation of money management concepts and may have a tendency to risk far more than you can afford per spread bet. You may not as yet realize the full significance of risking 2% or less of your entire budget per trade and, as such, could lose your money very quickly.

In reality, very few spread betting novices achieve any degree of success. The main reasons why most of them struggle are as follows:-

1. Their psychology is not disciplined or strong enough to cope with all the problems that spread betting can generate.

2. They allow their emotions to interfere with their spread betting trading strategies.

3. They do not fully realize the dangers of leverage and consequently overtrade as a result.

4. They do not treat spread betting in a business-like and professional manner but, instead, with a gambler’s mindset.

5. They trade many assets at the same time before they are proficient at one.

6. They do not fully comprehend the importance and significance of spread betting demo trading.

7. They believe that they can make profits from all their spread bets.

8. They do not know how to develop and test a spread betting trading strategy proficiently.

9. As they have little or no money management appreciation, they risk money that they can ill-afford to lose.

You have to realize that you will always experience losses when spread betting.  You can overcome the very debilitating experience of failure by developing a spread betting trading strategy that can be operated with confidence and in a consistent fashion.

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