Seven ways to mitigate the risk of spread betting
Spread betting is appealing for many reasons. From trading on margin to tax-free profits*, spread betting can make efficient use of your investment capital.
But spread betting also comes with risks. The same leverage that can lead to quick, sizable profits, can also lead to substantial losses. That’s why it’s important to mitigate risk wherever possible. Here are seven ways to do so.
1. Know what’s at stake
Spread betting is a form of leveraged trading, which can be great when you win, but bad when you lose. It’s crucial to understand that your per-point exposure is just that: if you have a £5/point trade and the market moves 25 points against you, you’re down £125.
Make sure you’re aware of how much is really at stake, and ensure you aren’t risking your entire investment fund on a single trade.
2. Trade with a demo account first
To reduce the risk of running head-on into failure, we recommend opening an InterTrader Demo Account. Using a demo account will let you see how margins are applied to spread bets, and how market fluctuations affect your profit and loss.
Furthermore, this step will let you mimic actual trades and monitor the results, all without using real money. Try making at least 50 demo trades before getting into the live market. Then when you’re ready, sign up for a real-money spread betting account.
3. Do your research
It should go without saying, but before you put your money on the line you should at least know the basics of spread betting. Take your time to read up on strategies and terms. Watch videos and attend webinars. The more you know the better.
4. Start with a familiar market
Spread betting lets you go either short or long on any market. This means you don’t need to identify a stock or other asset that is going to grow; you can profit just as well by identifying one that’s going to drop.
The best way to make an accurate prediction is to start with a market you know something about. For example, if you have experience trading commodity stocks, start with commodities. If you’ve made money from forex in the past, start there. It’s always good to branch out and diversify, but playing to your strengths, especially when looking to minimise risk, is a sound tactic.
5. Keep track of your positions
Markets move quickly, and if you lose track of your positions you can miss the chance to cash out at a profit, or to end any loss-making positions before they become too damaging. Make sure to keep an eye on your trades, even if you’re playing for the long term.
6. Place a stop-loss order
Your primary tool to manage your risk on an open position is the ‘stop-loss’ order. A stop-loss automatically ends a trade when the market hits your pre-set level. In other words, you can decide the maximum potential loss for any spread bet.
For example, say you buy EUR/USD at 1.1450, predicting that the price will rise. You might place a stop-loss at -20 points. This way, if the price hits 1.1430, your trade will automatically close, ensuring you can’t lose any more of your investment.
Even when utilising a stop-loss order it’s ideal to keep your eye on the market movement. Also, please remember that stop-losses are not guaranteed and may be subject to market gaps and slippage.
7. Hedge your bets
Many traders use spread betting as a way to hedge against stocks they own. For example, if you are invested in a market, you may go short with a spread bet against that same market so that you recuperate any losses.
In this case you are using a spread bet to mitigate the risk from your stock holding, but you could equally well use one spread bet to mitigate the risk from another spread bet.
Of course, this will lessen your potential overall profit, as well as your potential overall loss, but that’s almost always how trading works – risk and reward are relative and to increase one you have to increase the other. If you’re looking to play it a little safer, hedging is a way to decrease both your potential profit and your worst-case loss.
*UK taxpayers only. Please note that tax treatment depends on your individual circumstances and may change in the future.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.