With a new year upon us, now is the time that you might be thinking of beginning your spread betting journey, or maybe the time when you’re thinking about topping up your spread betting account with the cash you were given for Christmas.
How much to deposit in your account is a tricky question, because bigger bets mean bigger gains… and bigger losses!
How Much Can You Afford to Lose?
There is an old saying that you should “only invest (or speculate) with money you can afford to lose”.
It’s good advice when taken to mean only speculating with funds left over once you have paid the mortgage and other bills. It’s not such good advice when taken too literally by high earners, because… if you think you can afford to lose a lot of money, you probably will. I know this from past experience, or rather from past inexperience.
When I first started speculating in the markets I was “cash rich” (from my day job) and “time poor”. Not only did I not have time to monitor my positions- because of that pesky day job – but I also did not have time to properly test my theories, learn from my mistakes, and develop a trading plan. But it didn’t matter, because as my losses mounted I simply had to feed in more cash. I thought I could afford to lose a lot of money, so that’s exactly what I did!
Only when I quit the rate race to trade, write and publish full-time did I learn to control my risk and manage my money so as to minimise the money I lost en route to making money. This alone will not guarantee success, but it’s a better way of “buying time” while you discover the trading “Holy Grail” than buying time by throwing more and more good money after bad.
Don’t Lose Money!
Taken to its logical conclusion, the amount of money that you can afford to lose is NONE! But this is a little impractical.
Risk management is more than just setting a stop loss or deciding how much to stake on a trade. It’s a mindset. At its core, effective risk management is about preserving your trading capital so that you can stay in the game long enough to learn, improve, and eventually succeed.
Bet Small, Win Big: The Power of Leverage
Minimising your losses by (among other things) placing very small £1-per-point spread bets, or even smaller fractional bets, might seem pathetic. But thanks to the leveraged nature of spread betting, and the potential to pyramid your profits into bigger stakes, you really don’t need to bet big in order to win big. I proved it in 2009 by turning a very modest £600 into £18,000 within six months by spread betting. I know it’s not the millions you were hoping for, but you’d be happy enough making £18,000 as a 10% return within six months on a £180,000 “investment”. And whereas the traditional investor stood to lose £180,000 by making ill-judged stock purchases, I stood to lose only the original £600.
Practical Advice for New and Seasoned Traders
- Start Small: Begin with fractional bets or the smallest possible stakes to limit losses while gaining experience.
- Define Your Risk: Decide how much you’re willing to lose before placing your first trade. This amount should reflect your financial situation and trading goals.
- Commit to Continuous Learning: Use each trade, win or lose, as a learning opportunity. Analyze what worked, what didn’t, and why.
- Embrace Leverage Responsibly: While leverage magnifies profits, it also increases potential losses. Use it carefully, and never over-leverage your account.
- Diversify Your Strategies: Experiment with different approaches—momentum trading, contrarian investing, or value-based strategies—to find what resonates with you.
- Stay Patient: Trading is a marathon, not a sprint. Building wealth takes time, and chasing quick gains often leads to hasty decisions and unnecessary losses.
The Psychology of Loss: Why Losing Hurts
Losing money in trading isn’t just a financial setback; it can be an emotional blow. Many traders fall into the trap of “revenge trading”—taking bigger risks to recover losses quickly. This often leads to even larger losses.
By accepting that losses are a natural part of trading and focusing on minimizing them, you can maintain a healthier mindset. Remember, the goal is to trade well, not to trade often.
Conclusion: Play the Long Game
The amount of money you can truly afford to lose in trading is none. But since some level of risk is inherent in trading, your focus should be on controlling losses and maximizing the time you have to learn and grow.
Start small, bet smart, and let your profits grow over time. Spread betting is a marathon, not a sprint. By managing your risks and staying disciplined, you can turn modest beginnings into significant achievements – just as I did.
Remember, the goal isn’t just to make money – it’s to stay in the game long enough to master it. With discipline, patience, and a clear plan, you can turn trading into a rewarding pursuit that fits seamlessly into your financial goals for the new year and beyond.
