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How can I manage the risks associated with Spread Betting?

How can I manage the risks associated with Spread Betting?
Asked by
Brian Hayslip categorie-icon time-icon6 months ago

Justin Freeman
Answered time-icon6 months ago

A major factor to consider when Spread Betting is that you can lose much more than your initial stake.

Spread betting itself is relatively intuitive and is, in the simplest terms, a way for you to express your opinion as to whether something is under or overvalued. As the outcome of the event is not known at the time of placing your stake, the main way to manage your potential downside is through stake size.

Because leverage is used, when you make a small initial capital outlay you have exposure to a much larger position. This means that profits on winning bets will be multiplied should the market move in your favor, and your losses will increase in exactly the same way should you make the incorrect call on market direction.

The benefit of using small stakes is you remove the risk of heavy losses or even wiping out your account completely. Another advantage is that it allows you to manage positions according to your pre-planned strategies rather than fear or greed being your major drivers. Trading in small sizes will limit your upside as well as your downside, however, that raises the question ofwhat strategy are you using, that is, do you have a plan?

Markets can move quickly and unexpectedly. When this volatility is impacting your positions then things can get really scary.

When putting on a position you’d do well to use the widely available research and analysis tools that trading platforms offer for no charge. Taking Bollinger Bands as an example, you can use those to give an indication of what price action might look like if market volatility picks up. Unexpected news announcements are by their nature hard to predict, but those that might impact the market follow set timetables and details of announcement times are given in economic calendars available to all.

Announcements regarding US employment and interest rate announcements happen at set times, so someone adopting an aggressive risk-return policy might regardsuch moments of increased volatility as trading opportunities. It would be a high-risk strategy and it might be worth remembering a lot of institutional investors follow this calendar to ensure they are ‘out of the market’ to preserve capital to make money on days when it’s easier to read the markets.

No-one wins all the time and losses will happen but if you’re looking to make money out of spread betting then you need to fully understand it. Consider, are you putting on too many positions and just churning through ideas rather than following a plan?Have the market conditions changed to make your strategy redundant?If you don’t even know why you are on a losing streak it’s time to take the heat out of the situation, scale down and re-evaluate.

Stop losses can be used to mitigate your risks. The trading tool involves you inputting an instruction to automatically close out a position should a certain price level be triggered. They can also be used to trail a winning position and therefore protect profits. Your strategy should factor in the benefits of the different kind of stop losses that are available and in particular consider Gapping risk.

A more moderate approach to spread betting involves using a Demo account, putting on smaller stakes or devoting more time to research and analysis. The only way to take risk down to zero is to stop spread betting and take positions off. If that frees up time to try out new broker platforms or different strategies, then you could not only be avoiding market losses but improving your chances of making profits in the future.

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