Money Management
It is impossible to overemphasise the importance of money management in spread betting or any other type of financial trading. The number one rule is that you should strive to retain your capital. You should bet according to your plan, and just let any profits happen. As this is the opposite to what most beginners think – they think that making a profit is the primary purpose – perhaps it needs some explaining.
If it wasn’t for money management spread betting would be just gambling, continuing to place bets in hope until you ran out of funds. Depending on the financial security that you bet on, spread betting can be more risky than traditional trading. That is because you’re gearing or leveraging the value of your money, and every bet you take carries the chance that you lose more than the funds in your account. In effect, you are borrowing money from the spread betting company to place your bets.
Good money management requires you to figure out your possible gains and losses before even placing a bet, and making sure that they fit into your plan. You must know where you are going to close the bet if it becomes a loser, and once you have named the price then you must stick with it, and not adjust it as you go along. Many spread betters use stoploss orders to do this, and if you choose not to, you need another method that is as effective to cut your losses.
The trick to money management is to regard spread betting as a marathon, and not a sprint. It is not necessary to risk your whole account, or a large percentage of it, on any bet, and if you make a habit of this you are bound in time to fail. Whenever you place a bet the stake should be calculated so that your worst-case loss is not more than 2% of your funds. Some say 2% is conservative, but others use a lower amount.
Spread trading requires you to go against your instincts if you are to profit. Let’s face it, if you have studied the price chart and decide that the price will go in one direction, and it switches after you place your bet, then your mind tells you that you must be right, and you should hang in and ignore the move, as it will turn around. This will prove fatal to your account in the long-term, even if it works sometimes and the price comes back.
Similarly, and particularly after you have had some losses, it is natural to want to take a profit just as soon as it is available – but you should wait and see how far the price can go, so that you capture more profit. If you only make small gains, then your profits will not exceed the amount you lose, and again you will not win in the long run.
Managing Trade Entry and Exits
Focusing on exits has made my spread betting account much more profitable. I tighten stops at the first sign of trouble. If the stock is “just a trade” I take profits. If I like the stock on a longer term basis, then probably the spread bet is an adjunct to holding shares, and I tend to scale out of the spreadbet when the stock turns – 50% take profit, 50% keep running but keeping a close eye. I am unlikely to sell the shares unless something material has changed with the stock or it is close to my original target. For a new trade, I tend to have very tight stops on the basis if it goes against me, I have probably misjudged the entry and should come out and try again later. I now have an absolute rule that if that happens three times on the same stock I don’t trade the stock again on the basis I don’t understand its price action. I get booted out of a lot more trades but the ones that I stay in tend to be much more profitable.
The volatile markets we are experiencing means that it is much more difficult to take advantage of trends and choppy market conditions leave many investors dealing in traditional shares stuck in trades or underwater. Although all financial trading requires good money management, spread betting as a leveraged product needs particular attention to reduce risk and help you improve your chances at achieving profits. Make it part of your trading plan.