Leverage and Deposit Margin in Spread Betting

What is Leverage?

Once you have registered an account with a spread betting broker, you will then be provided with a leverage facility that can be 100:1 or even greater. As such, you will subsequently be able to activate large bets supported by just a minimum deposit. However, you must exercise caution under such facilities because high leverage can generate increased levels of risk exposure especially when price advances against your open trades.

Consequently, you must precisely calculate the maximum potential loss you could suffer for every bet your initiate in order to counter such concerns. If you ignore this task, then you could start over-trading by exposing your account balance to unwarranted levels of risks. As such, the sum you should risk per bet should always be just a pre-determined portion of your total equity. Specifically, you are advised to limit your risk to just 2% or less per bet. If you are a beginner, then using such a money management policy will increase your survival chances by providing maximum protection for your capital.

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The Benefits of Compound Interest and Leverage:

One of the most powerful forces known to mankind is considered to be compound interest. Spread betting has been able to attract many newbies because it presents you with excellent opportunities to exploit compound interest with the intent of growing your account balance at an exponential rate.

For just this reason alone, you should consider mastering the key aspects of spread betting in order to benefit from the power of compound interest. You can achieve this objective by consistently reinvesting your profits back into your trading account. By doing so, you could achieve a significant growth in your equity within a relatively short period of time. Investors even have a name for this type of trading which is called ‘bet compounding’.  As many experts at spread betting assess this strategy to be very successful and powerful, then beginners are well advised to follow in their path and adopt a similar attitude.

To understand why, consider the following example. Envisage that you commenced your spread betting career by depositing an initial sum of $10,000.  If so, you may be stunned to discover that if you had aimed to achieve just a profit target of 2% daily, then your initial capital would have rocketed to almost $1,000,000 in 12 months.

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Such a result appears great on paper but is it truly a viable proposition. The simple answer to this important question is an emphatic yes, especially if you realize that spread betting allows you to exploit not just the power of compounding but also enables you to reap the benefit of extensive leveraging facilities. For instance, assume that you are trading with a leverage of 100:1 which implies that your original deposit of $10,000 would enable you to execute positions worth as much as $1,000,000. As such, if you were to capture just a couple of wins daily, then you would easily surpass your daily target of 2% of your total equity, i.e. $200.

Nonetheless, although such objectives are achievable you must always assume a cautious stance when utilizing leverage because ill-conceived usage could quickly cause you to overtrade exposing your equity to uncomfortably high levels of risk. Instead, you should aim to devise a well-proven strategy that will stop you encountering such situations by advising you how to always provide maximum protection for your funds.

The Dangers of Leverage

You must understand as quickly as possible that spread betting entails more risk than most other traditional forms of investing. As such, your top priority must always be to safeguard your account balance because you will be betting on financial markets that possess the ability to generate substantial levels of volatility. Your spread betting broker will also provide you with an extensive leverage facility after you have enrolled.

Consequently, the combination of high volatility and leverage can produce a very dynamic spread betting environment that can generate excessive levels of risk exposure. You must therefore instigate measures and policies to help you control such factors otherwise you could suffer serious financial losses. In order to accomplish this task, one of your best courses of action is to obtain or devise a money management strategy that can stop you from overtrading.

One of your primary missions when you start spread betting is to avoid the habit of constantly replenishing your account balance. For example, if you can master the art of trading for an extensive period of time using just your initial capital then you will buy yourself the time to master all the essential concepts of spread betting. You can accomplish this objective by restricting the amount you wager on each of your spread bets.

You must understand that there is a considerable difference between risking 2% and 10% per bet. For instance, if you were unlucky to suffer 10 consecutive losses and wagered 10% of your total equity per bet, you would only have about 35% of your balance left intact. In contrast, if you risked only 2% under identical conditions, then you would still have almost 82% remaining. Clearly, the latter case will provide you with more time to learn all the intricacies of spread betting.

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