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Spread Betting

What are the risks when spread betting?

Answer ...

The great thing about spread betting is the ability to take highly leveraged positions (you get large exposures for a relatively small deposit) in comparison to if you bought the underlying instrument directly. However, as well as magnifying any gains, you magnify potential losses. Financial spread betting is at the high-end of the risk spectrum and therefore it is crucial that you understand risk and effectively manage it.

The first thing you need to do before you trade is properly understand the market that you are trading. You need to get a feeling for the potential volatility of the market which will help you devise your trading strategy. For example, the Forex market generally has a greater degree of volatility than developed share indices and as a result, your risk management tools, such as stop-losses, will be set differently. You will also have varying risk/reward expectations.

Once you understand how the market that you are interested in behaves, you need to evaluate the risk-management tools that your spread betting company offers. Almost all spread betting platforms will offer the ability to set a stop-loss. A stop loss is an instruction to close your position automatically when the price hits a certain level to protect you against further losses. It is essential that you set this so that you know your maximum possible loss.

When you have opened a position and you have your risk management tools in place, you need to monitor your open positions as closely as you can. If the market swings in your favour quicker than expected, you’ll be able to close the position and capture the gain. Alternatively, if bad news is released and you believe that your stop-loss is going to be breached, you may decide to close the position early.

The video to the right by Tradefair, one of our recommended spread betting company’s, gives more information on stop losses and other useful tools.

Tradefair Stop Losses & More

Is spread betting really for you?

Successful traders usually have a number of personality traits which help them be profitable over the long term. You need to understand that losses are inevitable on your journey to becoming a successful trader and you need to prevent your emotions getting involved. Think of each trade objectively. Have clear target entry and exit points and make sure that each trade is justified by a logical investment process. Trading on a ‘hunch’ or trading just to get a ‘buzz’ is unlikely to make you a successful.

Furthermore, you should only trade with money that you can afford to lose without it having a dire effect on your life e.g. not trading with the money that is needed to pay the rent or mortgage!

You also need to think about how the money you are spread betting with ties in with your other investments and your financial goals. See our investment basics section for more information on effectively managing and growing your money.

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