Spread Betting Risk ManagementInvesting in most types of assets such as company shares, precious metals or property carries some risk.
With spread betting the risk arises when the price or value of the share, index or commodity doesn’t move the way you expect. Put simply, if you bet that the price of an asset will rise and instead it falls, you’ll make a loss.
With spread betting, the amount of money you might lose — your risk capital — can be more than your outlay.
With Spread Co risk management features, like stop loss and limit orders, you can control how much risk you take.
Managing spread betting risk
Spread betting includes features which can help you to manage your risk. These can let you put a limit on your potential loss, and also to lock-in profits when they reach a particular level. The good news is that two of the main spread betting risk management features — stop loss and limit orders — come at no extra cost. So it’s easy to use them with all of your trades.
Managing the Amount at Risk
When you place a spread bet, you probably have an idea of how much you’re prepared to risk if the market doesn’t move in the direction you anticipate.
You can manage this using a stop loss, which lets you set a price at which your trade will automatically close. This would be lower than your buy price if you’re going long, and higher than your sell price if you go short.
But with a stop loss there’s no guarantee that your trade will be closed at that price, especially in volatile markets. If the market ‘gaps’, your order will be filled at the first available price.
Let’s imagine the UK100 (our benchmark index that follows the FTSE 100 index) currently sits at 5,500.
You think it will rise, so you take a long position. But to minimise your risk you set a stop loss at 5,490. If the index falls to 5,490 your trade will automatically close.
In this example your loss would be 20 (5,500 – 5,490) multiplied by your stake. With Spread Co you can apply a stop loss to any spread bet.
Guaranteeing your stop loss price
Volatile market conditions, when prices are rising or falling rapidly, can cause your stop loss order to be triggered at a less favorable price. This is known as ‘gapping through’ or ‘slippage’.
Placing a guaranteed stop order will make sure you achieve your desired price no matter the market conditions, but there is a small charge for using this feature.
Locking in profits with a limit order
If you have the time to keep a close watch on market prices and values, you might be comfortable closing your positions manually when you reach your desired profit level.
If you can’t do this, you might be better placing a limit order.
This means your trade will close automatically when your position reaches a particular price.
Looking at the UK100 index example again. You decide to go long so buy the index at 6,000.
You place a limit to close your position if the index rises and the lower end of our quote reaches 6,025.
If it does, then your limit will be triggered automatically. Your gain would be 25 (6,025 – 6,000) multiplied by your stake.
Using a stop loss and limit order together
You can use a combination of stops and limits on any spread bet with Spread Co.
While your position is still active, you can adjust your stop loss and limit order level at any time.
This can help you lock in higher profits, and reduce your potential losses further, when values are moving in your favour.
Our quote on the UK 100 is 5999.2-6,000, you decide to go long. You place a stop loss at 5,980 and a limit order at 6,025.
The index rises in value to 6,020. You could adjust your stop loss to 6,000 which would mean that you would break even if the index fell back again – assuming it didn’t ‘gap through’.
You could also adjust you limit order to 6,030, giving you potential to lock in a higher profit.