Calculate how much you stand to lose in a worst-case scenario
Always be aware of the downside
Before you place every bet you should calculate exactly how much you stand to lose in the worst case scenario, taking into account any stops you’ve set.
Bear in mind that major market events can have a very rapid impact, and sometimes you might fail to close the position at the right time, or the market could gap so you can’t get out of your bet at the level you want.
It’s particularly important to remember that spread betting uses leverage, so your losses can be much greater than simply the amount of your deposit.
Make sure the absolute maximum possible loss doesn’t exceed the maximum you’re willing to risk losing. Setting out a risk vs reward ratio for each position, as explained in attitude to risk, will also help you to do this.
Research the degree of risk
You can get a sense of the level of risk a market presents by reviewing its history and studying price charts. It’s a good idea to assess the amount of volatility each market typically sees – for example, what’s the maximum range (the difference between the highest and lowest price levels) that it tends to move through in one day?
You could also look at how the market has responded to past news events and data releases, which may give you clues as to how it might react in the future – although of course there’s no guarantee it will behave the same way even if similar circumstances occur again.
Tools can help you restrict any losses or protect any profits you make
Use risk management tools
Most spread betting providers will give you access to a number of tools that you can apply to restrict your losses or protect any profits you make.
The most important of these is the stop loss, which you can set to close your bet automatically if the market moves against you by a certain amount.
Guaranteed stops (if available) are particularly effective as they offer protection even if the market gaps.
Monitor the markets
When spread betting, it’s important to keep up to speed with market movements so you can tell when to open or close your bets.
Your spread betting platform may include an alerts system that you can set up to notify you when certain events happen, such as a market hitting a specified level. This releases you from the need to watch your screen constantly.
Most providers also offer an economic calendar, which will help you to plan for upcoming events that could affect your positions. They may additionally provide software that can track and analyse market movements on your behalf and identify patterns emerging, or even open and close positions according to your pre-defined strategy.
And some have an in-house financial insight team who can give you an expert view on how the markets are behaving, helping you to forecast movements that might impact your positions.
Don't rely on a 'gut' feeling – back up your decisions with analysis
Avoid emotional dealing
When making spread betting decisions, you should distinguish between those which are rational and those which are emotional.
Relying on ‘gut’ feeling alone can end in disaster, so it is advisable to back up your decisions with clear analysis.
Creating a structured spread betting plan can help you manage emotional risk by maintaining your discipline.
Diversify - but with care
Investors are often warned of the risks involved in ‘putting all your eggs in one basket’. For example, if you were to put all your funds into buying the shares of a single company, you’d risk a large loss if that company goes bust. On the other hand, if you diversified by buying shares from multiple companies in various industries, your loss from the one that fails would have a less devastating effect overall.
This principle holds true in spread betting – up to a point. Placing all your spread betting capital (the total amount of money you can dedicate to spread betting) on any one bet, for example, would be a hugely risky strategy that could swiftly end your spread betting journey. It’s wise to risk only a small proportion of your capital per bet. In addition, since the various asset classes can move independently of each other, betting across a mixture of shares, forex pairs, indices and commodities can make sense.
However, in doing this there are a few things to bear in mind:
- Take care not to diversify to the point where you have bets in numerous markets running simultaneously, making them difficult to monitor. The short-term, fast-paced nature of spread betting means it’s generally better to focus your attention on just a few assets that offer potential at a given time.
- Only diversify into new areas once you’re confident you know what makes them tick. Remember, markets can move rapidly and small changes can translate into relatively large profits or losses, so it’s very important to understand the factors affecting each market you’re betting on.
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