Sound money management is essential to success in spread betting or any other form of financial trading. Without money management you will find yourself running up untold losses and with a margined product such as spread betting or contracts for difference (CFDs) you will find these losses can accumulate quicker than you might expect.
So what really is money management and what strategies can we use to ensure we have sound money management in place?
Money management in spread betting is not keeping track of all the accounts you have your money in, although that is important too. No, money management is knowing how much money you stand to lose on each trade and if there are any other fiscal risks involved. For instance you may use a percentage of total funds strategy to risk on each trade. This is a great strategy as it determines how much money you stand to lose on each trade, how may trades you can get wrong before you go broke and if you should actually make the trade. If a trade comes along that doesn’t meet this risk criteria then you should move on to look for another or wait until an opportunity comes along that fist with your money management strategy. The best way to explain this percentage of fund strategy is by an example.
Lets say you have a spread betting account with £10,000 in it, or you have two accounts with £5,000 in each. Either way your total fund is £10,000.
Next you want to determine how much risk per trade you are willing to make.
Personally I like to try and stick to 1% per trade. Occasionally I have gone over this but as a rule of thumb 1% max. If you are new you may want to consider risking less than this. Try 0.5% or even 0.25% until you get more comfortable with trading.
If we use 1% that means we should risk no more than £100 per trade. 1% of £10,000 = £100
Using 1% risk pre trade means we would have to get 100 losses in a row to loss all our money. While this is possible it’s not very probable. If you find yourself in a situation where you have lost say 50% of your account I would strongly suggest you need to re-asses your strategy. Stop trading for a while and take a break. Read some more and try to find out where your strategy has been failing. Once you think you have identified the issues try paper trading or trade again with much lower stakes. Some companies such as FinSpreads offer £0.10 for the first 8 weeks*. This can be invaluable when you are just starting out.
The important thing to remember is don’t start trading at £10, £20, £50 or even £100 per point if it doesn’t meet your risk critera. It’s easy to get suckered in by the temptations of big gains that £100 per point offers but remember you can just as easily lose at £100 per point as you can win. In fact I would say it’s much easier to lose money than make it, especially if you are new to trading.
Trading takes time to learn and develop. Remember there is no rush, take your time, learn the ropes and hopefully you will succeed. I wish you all the very best in your trading.
*at the time of writing FinSpreads offer £0.10 per point trading for the first 8 weeks. This offer may vary from time to time or may no longer be available. Please check with FinSpreads for the latest offers and terms and conditions.