Guest contribution by Tarquin
The risks of spread betting are obvious.
The greatest is to your money. Full stop. You will often notice the prominent warnings attached to spread betting firm's adverts and websites telling you about the risks of spread betting.
This is is for a very good reason, not just an order from the FSA.
⇑ ⇑ ⇑ ⇑ Listen to our podcast summarising the potential Dangers and Trading Risks of using Spread Betting to Trade.
YOU CAN LOSE YOUR MONEY!
If that makes you tremble, leave here and resume whatever else you were doing before.
Quite often spread betting firms will use terms such as 'gearing' and 'leveraging'. These are terms that were originally used to describe the risks associated with Futures.
In spread betting they basically mean the same thing.
You can lose more than you stake.
Just because you bet a pound for every tick/point that the FTSE 100 moves up, that doesn't mean that you will only lose a pound if the FTSE100 goes down.
If the FTSE 100 moves down 10 ticks/points, you lose £10, 50 ticks/points = £50.
You can multiply whatever the movement is against whatever you stake. So you can imagine the losses you might get hit with if you are betting £10-£100 a tick/point.
The point being you lose more than you originally bet. But if that makes you feel nervous, just stick to the age old 'adage' of not risking more than you can lose.
This is not secret information, and I am not trying to put you off, but hopefully the reason you're here is because you are serious about financial spread betting, and want to learn how to do it with an extra edge, and reducing the risks of spread betting.
In spread betting terms that means starting with and staying with small sized stakes (the minimum) until you are comfortable and familiar with the platform or platforms you are using. In addition to this, you need to find the right market to trade. Most importantly you need to develop a systemized approach to trading that will lead to consistent spread betting profits.
If you are not making money with the minimum bets, why would you up your stake?
Do not ever get in the frame of mind where you feel that the market owes you, or putting on trades for luck, or the worst of the lot, spread betting with an 'all or nothing' sort of mentality. Try and get a clear idea of where you want to get 'into' trades and 'get out' of trades. This is important, both to stop out losses and to take profits.
Many spread betters find that by paying attention to this blog, that they start getting an idea of what to look for, namely good technical analysis levels, coupled with how to use these levels.
WARNING: beware of subscribing to any technical analysis services offering trials or any other gimmicks, they are usually run by people who don't actually have the balls (and yes, you do need these) to trade themselves.
Our spread betting guide is definitely a good place to start.
I cannot overemphasize this point enough, get an idea of the levels to look for, and an idea of what to do at those levels. If you don't, you'll end up feeling like you are just gambling, or listening to the latest news annoucement for guidance, a complete waste of time.
This leads me on to the other risk, that being the risk that is connected with any kind of betting.
You might like it. Yes, it might become addictive.
That's a good thing if taking on the challenge of spread betting in the financial markets and winning appeals to you. But if you are doing it the wrong way, then it's a bad form of addiction, and you will ultimately lose.
You might want to make big money fast, and stake too much too soon, this is a common mistake of not just spread betters but of any sort of short term traders. Like any form of gambling, the bookmaker always wins, no matter what, and they win for that reason.
Day trading or spread betting is not a quick fix, get rich game. If that's what you want then you'll find plenty of quick fix, get rich schemes on the net. The risks of spread betting should be noted.
Think about what you are doing and why you are doing it, take it slowly.
On the upside there are a few tools and techniques that you can use to help manage risk when you are spread betting.
These items will be a combination of features you can use on the trading platform provided by your chosen spread betting broker and also skills that you can learn through experience. We have put together our top tips for managing spread betting risk...
1. Always use a stop loss, always...
A stop loss is an exit order that is used to limit the amount of loss that a you will take on a trade, if the trade goes against you. For example, if you are long on a trade, and you want the price to move upwards, you will set a stop loss to exit the trade, if the price moves downwards too far.
2. Always set a target and exit point
A lot of traders focus on entry into a market i.e. looking for the perfect conditions to press the button, and send the order over to the broker.
Yes, this is important. However, research shows that the most successful traders spend just as much time defining when they are going to exit a trade as they do on entering a trade.
You may not always hit targets but at least you will always know what your expected outcome is. This will help keep your trading structured and objective. Try and keep emotion out of the equation.
3. Be aware of economic news & announcements
It is true that news and economic announcements effect the markets. When you are spread betting you need to be aware of news items that could have an impact on the price of the underlying market(s) that you are trading.
The impact of news on a market is usually an increase in price 'volatility'.
There are many methods on how to manage news and announcements. Our view point is “News is News” and the general impact on the market is usually an increase in price “volatility” i.e. the up and downs of price can be quick and move a lot of points in a short space of time.
Now we know what will happen to market prices on news announcements but how do we know what events are coming up and when? The best way is to keep an eye on an economic calendar. There are many economic calendars out there but we like the one over at our friends FX-Street.
4. Have a plan and stick to it
To help you manage risk and stay objective it is important that you formulate a trading plan and stick to that plan. Within you plan you should include what your approach to risk is. Also keep in mind that this risk is relative. A large risk to one trader may be an acceptable level for another.
A large risk to one trader may be an acceptable level for another.
