Reduce Your Spread Betting Risk With a Stop Loss
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Leverage is a very important to understand in the spread betting world, as it can be responsible for your biggest successes and failures.
In order to have a position open in your spread betting account, you only need to make a deposit that is a percentage of the total value of that spread bet. This is called the margin, and is what gives you the leverage to make huge gains (or losses).
If you are still a bit confused by this, then let’s take a closer look by using an example. Imagine that you make a deposit of £100 in your spread betting account. This £100 could possibly allow you to open a spread bet position that is closer to a £1000 equity investment. With this in mind, it is easy to see why you have great leverage in financial spread betting.
Because this leverage can either work for or against you, it is always sensible to make use of something called a stop loss. This helps to keep your risk to a minimum, avoiding any huge losses which could wipe you out.
Standard stop loss
When spread betting, you can set a predetermined level, that will automatically close a spread betting position. This is known as a stop loss. So if the price of a spread bet starts to fall, you can get out before taking too much of a financial hit.
Example of a stop loss
Let’s say that you are new to spread betting, and decide to take advantage of the many spread betting offers out there with various companies. With your new account, you opened a spread bet of £1 per point on the UK 100 at 5000. Now, if you were only prepared to lose £200 on this particular trade, then it would be a good idea to put a stop loss order at 4800. It is important to note that you might not get out at this exact number, but it will be close enough.
Guaranteed stop loss
A guaranteed stop loss takes things a little bit further and offers you even more security in your spread betting.
To take advantage of this kind of stop loss, you pay a small premium that guarantees your spread bet will be closed at the exact level you specify. With the standard stop loss, it is not always possible to get out at the exact level, due to market gapping.
Example of a guaranteed stop loss
Imagine that you decide to get into the Wall Street Index at 10100, with £2 per point, and feel that £300 is the maximum amount you are prepared to lose, meaning 9950 is your stop loss level. With a guaranteed stop loss, you will be ensuring that you get out at exactly 9950, and not just around that level.
