Spread betting can be a very lucrative endeavour. Because it pays out on a per-point basis, sizeable shifts in the market can yield massive profits. Of course, the same volatility that enables large, quick gains, can also result in large, quick losses. The risk of spread betting is further compounded by leverage, which is usually available in abundance through most online brokers.
In order to mitigate the risk involved with spread betting, traders are able to take certain precautions. Some of these are strategic, helping you determine a cautious approach to spread betting. Others are tangible resources that can be employed for the purpose of limiting potential losses.
Leverage is a great mechanism for buoying the value of your position. For example, you can obtain positions for a fraction of the actual cost, and buy into markets that would otherwise be prohibitively expensive. But there is a downside to leverage.
Leverage inflates the risk involved with a spread bet. The more leverage you have, the more you stand to lose if the market moves in an unfavourable direction. So while it can be tempting to ratchet up leverage as high as it will go, make sure your spread betting is within your means. This, on a fundamental level, means taking the time to understand the actual wager you’re making, leverage inclusive.
The stop loss command is available through most online and mobile platforms. It tells your broker to automatically abandon your position when a certain level of movement is reached. For example, if you bet that a stock will increase in value from £25, you could place a stop loss at £24. That way, you limit the amount you’re able to lose.
This is especially true if you’re looking to make a quick profit. The spread is the gap between the opening position of a market and the point where you start to profit. For example, if the spread is two points, a one-point movement won’t net you any gain.
While the spread is typically considered a barrier to profit rather than a cause of loss, traders will sometimes hold their position while the market bounces around within the spread, when they otherwise could have made a profit had the spread been smaller.
If you’re spread betting on forex markets, stick to major pairs. Not only are they less volatile than minor and exotic pair, they also tend to have smaller spreads.
Exotic pairs can be extremely profitable, but they are more erratic and volatile. If you’re looking to take a conservative approach, then major pairs should be your go-to.
Spread betting can be volatile, and it’s easy to ride the wave when things are going well, or decide to hang on when it looks like things just have to get better. But every time you place a spread bet you should go in with a certain expectation. And you should stick with it.
If you were expecting a stock to quickly rise but it’s slowly dropped, it may be time to bail. Not all spread bets will win, and it’s crucial to differentiate between a small loss and a big loss.