Risk management is one of the keys to Spread Betting. Preserving and protecting your working capital is key if you want to make a return from Spread Betting in the long run. In order to do this you want to minimize your losses when the market moves against you and maximize your returns when the movement is in your favor. To profit from Spread Betting a balance needs to be found between these two objectives.
When it comes to protecting your capital and managing your risk, the Spread betting industry has responded by providing facilities called Stop Losses. There are different kinds of Stop Losses available but the idea is the same a Stop Loss is the level which your trade will be closed limit your losses to any further market movement against you. A stop loss will be set at the level you wish it to be set at, though some Spread betting providers require them to be at least 5% away from the original value of the commodity, currency or stock being traded.
A stop loss is essentially another trade. For example if you implement a Buy trade with a stop loss as well, which is in the end not needed. You will need to communicate with your spread betting company, two things. To close your Buy trade and to cancel the stop loss. Some companies will automatically cancel your stop loss when you chose to close your trade, but it is important to check with your Spread betting company whether this is the case with them.
Types of Stop Loss
There are several different types of Stop Loss that are on offer and all have various features which may make them less or more attractive to you depending on your viewpoint. A Guaranteed stop loss normally comes with an extra charge in the form of a slightly larger spread but it gives you the guarantee that you trade will closed if it hits your stop loss level. A guaranteed stop loss is only available at the opening of a trade due to the fact of getting a wider spread to cover the cost. While a non Guaranteed stop loss is a free stop loss but the spread betting company doesn’t guarantee that the trade will be closed at the exact level that you determined, for example if 5% swing happened very quickly you might not be protected against the the whole movement before your stop loss kicked in.
Guaranteed stop losses can be extremely useful in very volatile markets in protecting your capital against violent market swings. While a non guaranteed stop loss may be better when you can monitor market movements personally in a less volatile market. Some Spread betting companies will require that you have a mandatory stop loss as they believe this is a necessary tool in proper risk management. While this has its advantage with all your trades coming with a stop loss (albeit not a guaranteed one), it also has the disadvantage that sometimes your trades might be closed by large momentary movements.
There can also something called a Trailing Stop Loss, which is designed to protect your profits in a situation where your trade is in profit but where you are worried the market might start to move against you lowering your profit. Moving your stop losses in order to protect profits is an another way to maximize your returns.
Part of The Beginners Guide To Spread Betting
