Risk occurs with the opportunities that come with spread betting. “For those who are asking, “Is gambling spread betting? – “No” is the answer.
But that doesn’t mean there’s no risk of money being lost.
Practicing careful risk management is one of the most important factors in putting together a good spread betting game, one that will generate profit for you.
The Risk Of Trading with High Leverage
Betting with financial spreads is heavily leveraged.
Although this provides the main benefit that it allows you the chance to make a ton of cash with just a small amount of starting money, it also entails risk. Many traders not acquainted with leveraged trading take on positions that are too big and, sadly, end up losing cash quickly as a result.
For you, leverage may be a vital asset, but you still have to be mindful of the possible risk of failure that it presents. It’s crucial to make sure you have enough trading capital to keep every spread bet position you take while trading with high leverage.
Otherwise, you risk closing bets because your account does not have enough funds in it to keep the position in the event that the market moves temporarily against your bet position, but dramatically.
The Risk of Market/Price Volatility
Market volatility for spread bettors is another significant potential risk.
After some economic events or the release of economic news, such as a change in interest rates, the financial markets can move dramatically. In just a few seconds, a market you’re spreading betting on will gap or leap to a much higher or lower price level.
This poses three potential risks, all of which can lead to major losses from trading:
-If you do not have a stop-loss order in place, your holding of a position with a huge open loss can result in a sudden, serious market change.
-You can incur losses far greater than anticipated even with a stop-loss order, as your stop-loss order can be filled at a price cost well above that noted on your order. There’s a way to prevent this: you can secure a guaranteed stop-loss order by paying a small fee. For eg, if you have a stop-loss order on a certain stock bet at £ 48, your stop-loss order would always be filled at the stated price level or £ 48, even if the stock price unexpectedly drops from £ 55 to £ 35 without intervening trades.
-If your spread betting account lacks sufficient funds to allow you to keep your bet position when the market makes a major move, even if you wanted to hold onto it, your spread betting company would immediately close your trade at a loss.
As a spread bettor, you need to be mindful that financial markets are eventually volatile and that rapid price fluctuations may occur, which may or may not be in your favor.
Be sure to check when major economic reports are about to be published and decide whether or not during such a news release you want to risk keeping your spread bet that can probably lead to massive price fluctuations in the market you are trading.
The Risk of Trading Cost
While spread betting provides major financial benefits, such as not having to pay stamp duty or tax on capital gains, that doesn’t mean it’s free. There’s no commission paid by spread betting firms. Spread betting firms, instead, make their cash from the spread itself.
You’re wise to shop around the different spread betting firms for this purpose to find one that usually provides the lowest spreads. Over the long term, trading with narrow spreads versus broader spreads will make a big difference in your profitability.
If you are a spread bettor who holds betting positions for long periods of time, it is extremely important to be aware of trading costs. You can incur funding costs on a regular basis, depending on the positions you hold.
If you hold a betting position for a long period of time, even if the market eventually shifts in your favor, it can turn out that the overall cost of borrowing adds up to more than your earnings or decreases your net profit at least substantially.
If you hold on to a losing bet for a period of time, the cost of borrowing alone will gradually eat up the margin you put down for the bet and require additional funds to be invested if you want to continue keeping your bet.
Summary
You need to be mindful of the dangers that are as prevalent in spreading betting as they are in any kind of financial trading. As detailed above, such risks include high-leverage trading, market uncertainty, and the possibility of trading costs eroding your earnings.
You are improving the chances of being successful as long as you know the risks and practice good risk management to mitigate them.