Even with all the market research in the world, a sudden event such as Lehman Brothers going under, or even an unexpected Nonfarm payroll reading, can throw the markets into disarray.
In spread betting, while such volatility can create large profits, it can also result in you losing more than your initial deposit. So how do you reduce your risk?
Use Stop Loss OrdersSo there are risks, but at the same time you can put orders on your bets which can limit your losses without impacting your upside.
The most common and popular order is a ‘Stop Loss’, this is an order to close a position at a particular price point.
E.g. If you speculate on the FTSE 100 with a £2 per point stake, and it goes up by 65 points then you would make 65 points x £2 per point = £130.
On the other hand, if the UK index dropped 45 points, then with your £2 stake you would lose 45 points x £2 per point = £90.
That wouldn’t be the best start.
However, most firms would let you can add a Stop Loss order at, let’s say, 30 points.
If you were betting on the FTSE 100 this would mean that your position would be closed if the UK index moved against you by 30 points. Therefore, instead of losing £90, you’d only lose 30 points x £2 per point = £60. (Not all Stop Losses are guaranteed).
However, assuming you correctly predicted the direction of the market, your upside would still be £130 if it moved 65 points or £80 if the FTSE 100 moved 40 points.
Where to Get a Stop Loss Order?Most firms these days let you use normal Stop Loss orders.
Reader should not that these orders are not ‘guaranteed’.
Spread Betting Account
|Stop Loss Available|
Guaranteed Stop LossesBy using Guaranteed Stop Losses, you effectively limit your potential loss on any spread bet to an amount you can afford to lose.
The difference between Guaranteed Stops and the standard Stop Losses (see above) is that the latter can fall victim to market gapping, whereas Guaranteed Stop orders do not.
Note that Guaranteed Stops often come at a small premium, e.g. a slightly wider spread.
Also see Guide to Guaranteed Stop orders.
Trade with Small StakesYou can trade with small stakes such as £1 per point or $1 per point.
To gain a little exposure you could just trade the popular asset classes, such as the Stock Market Indices, with smaller stakes.
Therefore you could speculate on whether the FTSE 100, S&P 500, Dow, DAX etc will go up or down for £1 per point.
Closing Spread Bets Using Risk-Reward RatiosOne method of selecting an exit target is to set a price target based on a risk-reward ratio.
E.g. if you are looking to take a position with a 50 point risk, you might use a strategy that targets a 3:1 profit.
This would mean that in the above scenario, your 50 point risk would see you target a profit of 150 points.
How to Cut Your Spread Betting LossesA loss can be more valuable to your spread betting education than a profit. Do not simply put it down to bad luck and move on. Think about what happened.
Could you have lost less or even avoided the deficit altogether? Did you try to let a profit run for too long?
By working out how not make the same spread betting mistake twice, you can tailor your spread betting style to make it more effective.
Exit Negative Positions EarlyRemember in financial spread betting your ultimate focus is your bottom line, not each individual trade. Do not be too proud to cut your losses if a spread bet is moving dramatically against you.
Sometimes, it is easy to let a loss snowball in the hope that the market will turn around.
By exiting negative positions early you can minimise the damage, learn from the loss and survive to trade another day.
Limiting Risks By Using FCA Regulated FirmsDon’t forget that another way of keeping your risk down is by using a reputable spread betting company.
In this case, that means a company that is regulated by the Financial Conduct Authority (FCA).
If you’re a ‘retail’ customer, i.e. you and me, and your FCA regulated provider goes bust then £85,000 of your deposits are covered by the Financial Services Compensation Scheme (FSCS) – for more details see FSCS.org.uk.
This is worth taking into account.
Like any business, spread betting companies can get into trouble e.g. WorldSpreads, Alpari and MF Global all went bust.
Luckily, most of their clients were covered by the FSCS.
A Surefire Way to Limit Your RisksOf course, the easiest way of limiting your risk is by not spread betting
Yes, there’s no upside but you won’t lose either.
Spread betting carries a high level of risk. You can lose more than your initial investment or stake. Spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.