Risks associated with spread betting
Understand more about the risks involved in spread betting and how to manage them.
What are the risks of Spread Betting?
There are a number of Spread Betting risks which should form the basis of a strong risk management strategy, these include:
- Market volatility - volatile markets can move quickly and while this presents opportunities, it also presents risks to traders
- Trading on leverage can expose you to greater potential losses than with more traditional forms of investing
- You can lose more than you invest
Managing your trading risks
Spread Betting risks can be minimised with the use of City Index's powerful risk management tools as well as the use of a solid risk management plan. It’s impossible for any trader to know exactly how a market’s price will move at any given time, but by using the right risk-management tools, you can limit your potential losses without capping your profit potential. Risk management should play a crucial role in your trading strategy.
At City Index, we offer a range of tools to help you manage your trading risks, such as:
- Education to help enhance your knowledge of spread betting and help make you feel more confident when placing your trades
- A real-time economic calendar that covers major market-affecting events in the UK, EU and US and more to help you plan your trades
- Stop loss orders including standard, trailing and guaranteed stop losses
How do risks impact your trading?
With spread betting, there are two major risk factors to consider: volatility and leverage
Spread betting is a leveraged product. Therefore, with a smaller initial capital outlay you have exposure to a much larger position. This means that your gains will be multiplied if the market moves in your favour. Equally however, your losses will be magnified in exactly the same way if the market goes against you
Markets can move quickly and unexpectedly. Major earnings announcements, political upheavals, or natural disasters are some of the events that can impact equities, bonds, and commodities. While volatility can provide trading opportunities, it can also pose significant risks
What is margin and why does it matter?
Margin is the amount of capital required in your account to cover your open positions. Trade positions should be sized prudently and you should always ensure you have sufficient funds in your account to cover any potential losses for the period that you hold an open position.
If you don't you could quickly find yourself on a margin call, which can happen when you don't have enough funds in your account to keep open the position which puts you at risk of having it automatically closed out.
Learn more about margin close out.
What is a Stop Loss Order (SLO)?
A Stop Loss Order is a market order which you attach to your position. It will be triggered should the market move against you and your position reaches a pre-determined price level set by you. A key risk management technique is to place a stop loss that will automatically close the trade if the price falls below a certain level.
Stop losses are useful because they mean that you don't need constantly monitor your positions and wont be tempted to run losses by staying in the trade longer than is smart.
A standard stop loss order, once triggered, closes the trade at the best available price. There is a risk that the closing price could be different from the order level if market prices gap. Market gapping occurs when there is excess volatility in a market and prices move more rapidly than normal. This can result prices moving beyond a pre-determined order level.
At City Index, we offer standard stop loss orders freely across all markets on your trading account. Stop losses can be added when placing the trade, by clicking the stop loss box and entering your stop loss price. Should you forget to add a stop loss you can also add one once the trade has been opened.
Points to consider when setting your stop loss
- Stop losses should be placed according to market conditions and should strike a balance between being too close to the market price and too far
- Stop losses can also be moved during the course of an open trade in order to lock-in or break even on any profits that may have been made
- However, stop losses should only be moved in the direction of the trade, and not in the opposite direction. Moving stop losses in the opposite direction of a trade can potentially leave you with substantially larger losses
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