Spread betting risk management strategies

Spread betting risk management strategies

by David Redmond on 15 Jul, 2011

Spread betting is risky business. Due to the fact that spread betting companies allow you to trade on leverage, the potential for large profits and significant losses are huge.  Especially in excessively volatile markets your profits can quickly turn into large losses when you choose to spread bet – leaving a trader with less money than they had originally started off with.

There are, however, some key spread betting risk management strategies that one can put in place to offset some of the risks associated with spread betting.

One of these risk management strategies is the guaranteed stop loss.  A guaranteed stop loss will automatically close your trade when the spread reaches a certain level, thereby cutting the potential losses you are exposed to whilst spread betting.

Some experts and analysts suggest that the use of hedging is the most effective tool to use in order to protect you against possible losses. For example, if you currently hold a long position on a spread bet on share A, but believe the share’s price may fall due to unforeseen circumstances, you may choose to hold a corresponding short position on share A on a CFD trade. By using CFD trading as a hedging tool against your spread bet what you effectively do is limit your chances of suffering a major loss.

Also, if you encounter excessive volatility it is best to stand aside for the storm to die down rather than continue trading. Even though niche financial products such as spread betting and CFD trading rely on volatility for large profits, excessive volatility could confuse the trader and lead to irreversible losses.

Finally, a good trader will know when to exit a position and limit their losses. Spread betting losses may accumulate as a result of a wrong position taken.  In such situations, you do not have to wait until the end of the betting period.  It is therefore advised that you know your exit price before taking a position.

Through implementing some of these techniques one can ensure that, even when a bad spread betting decision is made, you do not lose large sums of money unnecessarily when spread betting.

 

About the Author

David Redmond


David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.