Spread Trading Risks

Spread trading accounts are suitable for more sophisticated investors (i.e. experienced ones) and those who are willing to risk the occasional big hit in the hope of making greater profits further down the line.

What the Risks Are

Spread betting simply magnifies the risk of ordinary trading many times over because of the gearing aspect. But it also releases your capital and has other advantages. Just as people lose their houses because of pokie problems, they also lose their houses through poor share trading or spread trading. But the core problem is people not understanding risk. Before you start spread trading, it is extremely important you understand the high level of risk when financial spread betting.

Here, it is important to understand that the initial margin that you deposit with your provider to open a position doesn’t constitute your market exposure. In order to open positions you must have sufficient funds in your spread trading account to cover the notional trading requirement. However, if a trade were to move against you the spread trading company can ask you to deposit more cash and this is sometimes referred to as a ‘margin call’.

The potential for large gains must be balanced alongside sensible risk management and a solid risk-management strategy – for example using guaranteed stop losses – can minimise this.

Financial markets fluctuate in value throughout the day and at times these movements can be unpredictable due to uncertainty in the markets. It’s possible to control the exposure to risk and limit your liability to loss by using a range of risk management tools:

Controlled risk bet – sometimes referred to as a guaranteed stop. This lets you specify the level you want your bet to be closed at, should the market move against you.

Stop loss order – can be used to limit your trading risk and lock in profit.

Limit Order – allows you to pre-determine a price higher than the current price at which you wish to sell, or a level below the current price at which you wish to buy.

One cancels the other order (OCO) – is a combination of both a limit and a stop and is useful for those wishing to get in and out of the market without having to watch it constantly.

Make sure you understand how these tools work and when you should use them. Most importantly, start trading with small amounts.