How ShortsandLongs Works
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ShortsandLongs allows you to manage the risk on a trade in a guaranteed way such that you will never be able to place trades which could lose more money than you have in your account.
By using the complimentary profit level settings you can govern your profit or loss within guaranteed objectives.
UK 100 Trading
Let’s say you are looking at the UK100 (FTSE 100) September future price. On the ShortsandLongs website you can see the spread at 5400-5403 and you take the view that the market will move downwards.
Therefore you would ‘sell’ or ‘go short’ at the ‘sell’ side of the price, 5400.
You now have to decide exactly how much you want to risk on this trade (obviously up to a maximum of the funds available to trade in your account).
This figure can either be input as:
- a monetary risk level, or
- a price level
Supposing you had entered your Sell for a stake of £20 per point and had an ‘available to trade’ balance of £1,000, of which you wished to risk £500, leaving a further £500 available.
You could either enter a monetary risk of £500 or a price level of 5425 (either way, the equivalent amount or price would show on your dealing ticket). This number can be calculated by:
(Trade price of 5400 – Risk level of 5425) x £20 per point stake = monetary risk
25 points x £20 per point = £500.
Because ShortsandLongs guarantees all risk ‘stop’ levels (for free), there is no fear of you losing more than this.
If the buy price in this market now trades at 5425 or below, your risk (‘stop’) level would be triggered and you would automatically buy £20 per point to close your trade, losing the £500 risk you had specified.
The amount that you choose to risk is up to you, within the bounds of the minimum stop distance and the amount available to trade.
New Trading Example
So, on the trade above you could have chosen to risk your total available balance (£1,000) which would have set a risk level at 5450, or you could have set a risk level at 5423 (the minimum distance), which would have risked £460.
If your stake had been smaller or larger, these numbers would change proportionally.
You could choose to trade £3 per point rather than £20 per point. If you set your Stop Loss to 5423 that would markedly reduce your risk.
(Trade price of 5400 – Risk level of 5423) x £3 per point stake = monetary risk
23 points x £3 per point = £69.
Setting Profit Levels
Optionally, you are also able to set levels at which to take a profit. There are no constraints on the levels. Profit levels, once set, are also guaranteed to deliver the required profit, if triggered.
As you can see, this model of trading with mandatory guaranteed risk levels offers both peace of mind and ultimate flexibility. Any view can be expressed within the bounds that you set yourself, constrained only by your ‘available to trade’ balance, your stake and your risk level.
Guaranteed Profit?
One further sophistication to this simple model is the concept of ‘Guaranteed Profit’.
Let’s assume that the market fulfils your expectation and falls to, say let's 5258-5261. At this point, you would have an unrealized profit of £2780
(Trade price of 5400 – Current Price of 5261) x £20 per point stake =
139 points x £20 per point = £2780.
Therefore you could choose to move your risk level to a point where it was guaranteed to result in a profit from your original trade price. You could set your trade to close at, let’s say, 5300 points, which would ‘guarantee’ a profit of £2,000.
(Trade price of 5400 – Risk Level of 5300) x £20 per point stake =
100 points x £20 per point = £2,000
Balance Increase
ShortsandLongs would label the above as ‘guaranteed profit’ and would increase your ‘available to trade’ balance accordingly, which would now be £3,000 (original £1,000 + guaranteed profit £2,000).
Also see Where to Spread Bet During the Credit Crunch.
ShortsandLongs Account / Website
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'How ShortsandLongs Works' by DB, updated 20-Sep-11
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