Preventing Margin Calls

21money280813Why You Must Avoid Margin Calls

One of the primary reasons why risk and money management is so vital is that you can utilize this tool to eliminate margin calls. You will discover that margin calls can be one of your main headaches when you first commence your spread betting career and you must instigate policies immediately to help subdue their negative impacts as a top priority.

Your spread betting broker will implement a margin call if your trading actions become so rampant that they start exposing your capital to significant levels of risk. A margin call is produced whenever your useable margin plunges to zero which means that you do not possess enough money any longer to support your active spread bets. If such circumstances arise, then you will have to witness all your open positions being terminated immediately.  If any of your spread bets are also registering losses, then your capital will be reduced by their total amount. In fact, receiving margin calls is one of the quickest methods to totally wipe out your entire account balance.

After you have suffered the depressing impacts of margin calls, you will then have to try rebuilding your confidence and motivation so that you can commence spread betting once more. However, you will discover that this task may be difficult to achieve because margin calls can generate long-term psychological distress.

When you start spread betting, you should discover that margin trading has some inherent advantages because it enables you to utilize leverage, which permits you to open new trades of considerable worth with just a small deposit of your own. For example, if your broker provides you with leverage of 100 to 1, then you could implement a new $100,000 position with just a deposit of $1,000.

However, although this concept sounds very impressive, you must understand quickly that there are serious problems associated with the misuse of leverage should price move against your open positions. If you have over-traded and price has advanced extensively against your spread bets, then your broker will issue a margin call that will automatically close all your open positions invoking potentially substantial losses.

 

Protecting against Margin Calls

How can you protect your capital from margin calls? You can achieve this objective by devising and implementing a well-tested and proven risk and money management policy that will ensure that you will not overtrade by subjecting your own funds to excessive levels of risk exposure. You must also master how to subdue dangerous human traits, such as fear and greed, so that they do not dominate the accuracy of your trading decisions. Sadly, spread betting can quickly lure you into allowing such distracting influences to dominate because its colossal daily turnover can rapidly influence your trading mentality by encouraging you to instigate larger gambles than advisable.

In addition, you must appreciate that spread betting can generate very volatile conditions that are capable of producing large price spikes without prior warning. As such, the combination of excessive leverage and high levels of volatility can create unpredictable trading conditions that can easily cause you to overtrade if you do not adopt a cautious stance consistently.

In fact, leverage misuse and margin calls are the two main reasons why so many novices fail at spread betting losing their total initial deposits in the process.  If you do not exert sufficient effort to restrict your risk exposure per spread bet under all market conditions, then you could expose your capital to the dangers of margin calls. You must attempt to counter this problem as a top priority by implementing a proven risk and money management strategy.

 

How much should your risk per spread bet?

Essentially, you must limit the amount of your total funds that you will wager per spread bet. How can you determine what is a sensible value to risk? To answer this query, consider the following analysis.

You must urgently understand that there is a substantial difference in risking 2% of your total capital per spread bet than 10%. For instance, if you risk just 2% then you would lose only 17% of your total equity if you were unfortunate to endure ten successive losses in a row. Under similar conditions, you would suffer losses amounting to about 66%, if you wagered 10% per bet.

After studying the above example, you can readily conclude that utilizing a lower risk percentage per spread bet will certainly help you minimize the threat of margin calls as well as providing optimum protection for your funds.  You should also now realize why so many professional traders emphasize the seriousness of restricting your risk exposure by wagering no more than 2% of your total capital per spread bet.

Leave a Reply