Risk Management Strategies Every Spread Bettor Should Know

Structural benefits that make spread betting particularly attractive are that there is no stamp duty to pay in the UK, you can trade long or short on thousands of markets and there is no commission on most spread betting platforms. However, these attributes do not compensate for one thing: most retail players lose money. Risk management is not something only advanced level traders should be aware of, but the basic concept of how to manage risk is the first thing that any long-term spread betting strategy should include. This article is about the essential ideas that really count and the drawbacks for each.

The Risk Environment in Spread Betting

Spread betting is a derivative product. You are not a proprietor of the underlying asset; your risk is based on stake size x price change. It is this relationship that makes leverage so important (small price moves can make or break you in terms of the amount of capital you have invested).

If you’re still learning the mechanics of spread betting, such as how the margin requirement works, how the position is priced, and how to get a margin call – consult educational resources like https://capital.com/en-gb/ways-to-trade/spread-betting, which offer a structured breakdown of the basics before any risk strategy makes much sense.

For spread bettors, the most important types of risk are:

• Leverage risk. Amplified exposure – losses track closely with potential gains, and sometimes exceed them in volatile environments.
• Overnight/Weekend risk. Trades that are left open during a market close can be at risk of a gap open when markets reopen, especially after data or geopolitical events.
• Slippage risk. Stop-loss orders can be triggered at less desirable prices, particularly in markets that move quickly.
• Margin call risk. Account equity will be automatically closed at a loss if it falls below the required margin level.
• Liquidity risk. In thin/fast-moving conditions, it is not guaranteed that you will be able to enter/exit a position at a desired price.

A regulatory requirement for all FCA-regulated spread betting providers, the mandatory risk disclosures reveal that more than 70% of retail client accounts make a net loss in any year. That is true for all providers and under all market conditions and suggests underlying issues in retail leveraged trading and not just a few unfortunate runs of bad luck.

Regulatory Leverage Caps and What They Signal

According to FCA rules, the maximum leverage is 30:1 for major forex, 20:1 for major indices, 10:1 for commodities and minor indices, and 5:1 for individual equities. The reason for these caps was that there was a clear correlation between increased leverage and increased retail losses. Assuming as much leverage as you can, even within the allowable limits is a significant risk factor that many of those who are new to the investing game, especially, tend to underestimate.

Position Sizing and Capital Allocation

Sizing a position is not about putting on a trade because you have a certain confidence or conviction in it, but about measuring the trade’s potential loss against the overall size of your account. It’s one of the more tangible risk management mechanisms retail traders can employ and has a few aspects we want to discuss separately.

Percentage-Based Risk Per Trade

One such method that is widely discussed is to minimize the size of each trade such that the amount of money that can be lost from the entry point to the stop-loss is a small fraction of the amount of money in the account. This ensures that the losses are proportional and helps to minimize the rate at which an account is drained when it is losing. The problem is that it must be used consistently and there is no obvious formula to calculate the stakes based on the distance to the stop.

Exposure Across Multiple Open Positions

It doesn’t just involve the trade risk of the individual. Multiple positions at once can result in multiple exposures that may be much greater than one trade suggests. When markets are trending against you, trades can close out at the same time, adding up to losses that can be greater than a trade-by-trade analysis indicates.

Adjusting for Instrument Volatility

A stake size appropriate on a major currency pair could result in a surprisingly large loss on a commodity or small-cap equity. Some traders will use volatility measures such as Average True Range (ATR) to stake according to the amount of volatility that is typical for a particular instrument. These are simply useful approximations, not precise predictions; historical volatility does not imply future price movements.

Setting Drawdown Thresholds

Knowing in advance how much losing would warrant a 12-6 halt and reconsideration of any decision is a counteracting force on hasty decision-making when a losing streak happens. This is when losses are piling up and the urge to get back into the market is at its peak, and that’s why it’s more worthwhile to set a boundary before entering the game than making a decision while you’re in the game.

As can be seen in the table below, for a series of consecutive losses, there is a percentage of risk given per trade, and this percentage is applied to the balance of the total losses:

This is illustrative only and not prescriptive – it is to demonstrate the increase of compounding as risk levels increase and not to suggest any specific percentage.

Stop-Loss Orders: How They Work and Where They Have Limits

A standard feature on spread betting platforms, stop-loss orders are the most direct way to limit losses on open positions. Knowing where they work well – and where they don’t – is as crucial as knowing how to set them.

Standard Stop-Loss Orders

A regular stop is a stop that is based on a price. This, in normal conditions, functions in a general way as intended. There are a number of situations where execution is a lot less reliable:

• Key economic reports, like CPI data, employment data, or GDP reports.
• Decisions and statements made by the central bank regarding its rates of interest and forward guidance.
• Announcements from individual equity companies regarding their earnings.
• Gaps in the weekend and between sessions after major geopolitical events.

In these events, the price may cross a stop level without actually touching it, thus getting executed at a price level meaningfully lower than desired. With a normal order, there is no limit to the extent of that “slippage.”

Guaranteed Stop-Loss Orders

A guaranteed stop-loss order (GSLO) helps eliminate slippage risk by guaranteeing that it will be executed at the right level no matter what is happening in the market. The downside is that GSLOs come with a price – they tend to be bought at a premium price, usually triggered at the time the order is placed, not when it is used. This can be a fair price for additional confidence when trading large sizes in volatile assets, or when trading assets during known event risk periods. The premium can be an unwarranted additional cost over time in stable situations for short-term roles.

Correlated Positions and Concentrated Exposure

Having more than one open position does not necessarily mean that the risk is spread across separate outcomes. If positions have a similar main factor, such as a sector, a currency, a geographic area, etc. one macro development can impact on all of them and create a total loss that is much higher than what each individual position would indicate.

Factors that frequently produce correlation risk to track are:

• A group of stocks in a particular sector of the market, such as several stocks in the financial or technology sectors
• Forex pairs with the same base or quote currency – EUR/USD and GBP/USD always fluctuate with USD sentiment.
• Position index, along with individual constituent stocks in the same index
• Commodity-related company stocks at the same time as commodity prices
• Two or more emerging markets currency or equity positions that share a regional sensitivity
• A wide range of equity market long positions during times of general risk-off.

There is the possibility of simultaneous losses with correlation awareness. Correlations between asset classes are likely to become more similar during broad market selloffs, when diversification is most important. At least, however, it makes exposure more transparent and easy to monitor on a general level, understanding how open trades relate to each other.

Trade Records and What They Reveal Over Time

One of the more practical habits that a spread bettor can have, regardless of his experience level, is to keep a detailed record of each and every trade and to actually review it. Whether you like it or not, retail traders have been shown over and over again to have certain systematic tendencies, such as staying in a losing position longer than a winning position, and self-review is shown to improve the recognition of that over time. That awareness does not necessarily fix the behavior, but at least it is an honest place from which to start tackling the behavior.

A trading log that’s truly valuable contains more than entry and exit prices. A complete log should contain:

• The instrument that was traded, and the market context at the time of the entry
• The rationale behind taking the position
• The actual prices of entry and exit in comparison to the planned prices
• Stake size & any stop loss utilized
• The time or session the trade was made in
• Any decisions during trade that deviated from the original one
• The results in actuality as compared to the results that were anticipated

It’s the process of looking back at these entries, observing the recurring themes and seeing the overall wins and losses that bring up insights that experience alone would not necessarily give. Under which market condition(s) did the market exhibit the most slippage? In what areas did in-trade decisions invariably differ from the original plan? In which instruments or sessions were the greatest differences between expectations and results? These questions can only be answered with constant records.

Conclusion

Risk management in spread betting is not a method to avoid losses; it’s a system to make more considered decisions on how much to risk and when. Each of the strategies presented here has relevance in the real world, and each has its limitations. Selective use, or only applying when a losing streak arises, is different from using them as a continuous part of a trading regimen. Regardless of the level of experience, perhaps the most important aspect of any market decision is the quality of the thinking behind the risk management process.

Disclaimer

This article is not meant to be taken as medical advice. It is not financial advice, investment advice or a buy, sell, or hold recommendation of any financial instrument. Spread betting is a leveraged product and is a high-risk product. Losses may be higher than the initial investment. This information is not a solicitation or offer to trade. There is no guarantee of future performance based on the past. Spread betting is regulated by the Financial Conduct Authority (FCA) in the UK. May not be legally available or appropriate in other jurisdictions. Individuals are advised to check their own situation and any profits or losses from spread betting may be subject to change in tax treatment. If you have any doubts about spread betting and whether it is right for your financial circumstances, you should take impartial professional financial advice prior to any spread betting.