Managing your risk
As you can see from our trading examples, spread betting can be risky. Like doing anything that involves risk, however, you can take precautions to help minimise its impact. In spread betting, there are many skills you can develop to help cut down your trading risk.
Be wary of volatility
It doesn't take much for market prices to move quickly and unexpectedly. A major (or even minor) economic announcement, a breaking news story, natural disaster, or other event can cause markets to move. Volatility can provide trading opportunities but it can also bring significant risks.
Manage your leverage
As you saw in our spread betting example, leverage can help produce substantial profits as easily as it can cause substantial losses. Always keep this in mind when you trade.
Protect your position with order types
Place an order from the chart, dashboard or quoteboard at the market price
Stop and limit orders
Protect your potential profit or help minimise loss by setting a stop or limit at a certain price. When the market hits your price, the order is triggered.
Parent & contingent orders (P&C)
Set up an entire trade start to finish: when to get in and when to get out.
Automated Trailing Stop
Set your stop to trail the market price to help capture additional profits while minimising losses
Exit the market in fractions of your original order. Like a P&C, you can set up an entire trade, but the order is applied if you're trading more than one contract.
Most orders do not guarantee prices or, with stops, execution. For an extra charge, this type of order guarantees execution at your specified price. (However, remember to check the latest Margin rules from the 1st of August and your market before you use this type of order as it is not available for all markets.
Set proper stop levels
You might say that setting a stop is an art - you need to make sure that your stop loss order is set so that your trade can handle smaller jumps and drops in price while protecting you from losing your shirt if the market doesn't go your way. A stop order that's too narrow may lead you to re-enter the market, causing you to get stopped out again. That can cause more damage to your account balance than if you entered a stop order that was too wide.
Check your emotions
Sometimes, the factor that determines how successful your trade will be isn't the amount of research you did, but your mindset at the time. As you trade, try to stay objective and calm. Even if you have a losing trade, resist the urge to enter another trade immediately just to win your losses back.
Create a trading plan and stick to it
A good trading plan is crucial to your success as a trader. Face it - without a plan and a rules-based approach to trading, you are simply trading by the skin of your teeth. It may seem to work for a while, but self-doubt and/or greed will ultimately get in the way of being consistently successful. The good news is, it's fairly easy to create.
When constructing a trading plan, ask yourself:
- Will I trade only one specific market or many?
- How will I analyse the markets?
- How much do I want to make?
- How much am I willing to lose per trade?
- How many consecutive losses will I tolerate before I stop?
- How will I use stops to control my risk?
Using your answers, write out a short but detailed plan of action. Try keeping a diary of every one of your trades. It will force you to follow your rules and avoid impulse trading as much as possible.
At Tradefair, we offer a free practice account so you can test your trading strategies and learn how to use our different platforms.