Many people highlight the risks of spread betting, of losing thousands of pounds on volatile markets. And they are right. With spreads you can risk winning or losing a sizeable sum on each bet.
So how to have the upside without the downside? Have a look at adding a Stop Loss to your spread bets, if your positions are going pear-shaped and you start losing a lot of cash, a Stop Loss can close your bet and stop you from losing any more money.
Where can I get a stop loss?
Most of the leading spread betting firms offer stop losses, some like FinancialSpreads.com, Capital Spreads and paddypowertrader add a stop loss automatically to every trade.
You still haven’t explained why I should use a Stop Loss?
Let's wind the clock back to August when the markets were spiralling down because of the credit crunch. Many spread bettors were selling the FTSE 100 and Dow as the markets accelerated downhill. The US Federal Reserve then, unexpectedly, cut the discount rate by 0.5% and the markets rallied sharply.
City Index and CMC markets reported that a number of clients hadn’t opted for a stop loss and got their fingers burnt. A classic example of why spread betting has a bad reputation.
Meanwhile Simon Denham of Capital Spreads (where all trades are automatically given a stop loss) said that "a few individuals lost a few thousand here and a few thousand there...we didn’t have to make the big margin calls like other firms".
In short, Capital Spreads protected their clients who were selling FTSE 100 and The Dow. Those clients still lost cash but not as much as they would have without a Stop Loss.
How to Tighten a Stop Loss?
With a firm like FinancialSpreads.com, you can generally tighten your Stop Loss when placing the order. The stop is set to the amount of money in your account. Simply update the Stop Loss field on your trading slip.
How to Widen a Stop Loss?
As mentioned above, the Stop Loss is set to the amount of money in your account. If you want to widen your Stop Loss you will need to deposit more funds. A crude but effective method. If you can afford it, you can put more funds in. If you can’t put more funds in, you can’t afford the risk. By depositing more funds it also reminds you of how risky the markets can be.
The Downside?
One negative is that in highly volatile markets you can find that your trade swings too far one way, the Stop Loss kicks in to close your bet and then the markets move back the way you wanted them too. Without a Stop Loss your trade would be fine but with a Stop Loss you lose (because your position was closed before the market recovered).
Of course, as mentioned above, if you're in a volatile market and are worried about this happening then you can always set the stop loss to be further away.
What Else Can Go Wrong? Gaps
Stop Losses are not guaranteed. The markets can "gap". The markets rarely move smoothly and therefore your Stop Loss might be closed at a different level.
Let's say you buy the FTSE 100 at 6698, then your Stop Loss could be set at 6658, if so:
If the FTSE dropped to 6670 you trade would still be open, you've not hit 6658 yet
If the FTSE then dropped to 6660 you trade would still be open, youive not hit 6658 yet
If the FTSE then dropped to 6652 (ie by passed 6658) your trade would be closed at this level of 6652 not 6658. This is because the firm never offered 6658, it moved the market from 6660 straight to 6652
Where can I get a stop loss?
Most of the leading spread betting firms offer stop losses. The following add automatic stop losses to every trade:
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'Spread Betting - Stop Losses' by DB, updated 10-Nov-07
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Risk Warning: Spread betting carries a high level of risk to your capital and 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.
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